Q1 2023 Exxon Mobil Corp Earnings Call
Please standby were about to begin.
Good day, everyone and welcome to this Exxonmobil Corporation first quarter 'twenty to 'twenty three earnings call. Today's call is being recorded and at this time I'd like to turn the call over to the Vice President of Investor Relations Ms. Jennifer Driscoll. Please go ahead ma'am.
Good morning, welcome to Exxonmobil first quarter 2023 earnings Congress, Thanks for joining us today.
I'm, Jennifer Driscoll, Vice President Investor Relations.
With me are Darren Woods, Chairman, and Chief Executive Officer, and Kathy, Michael Senior Vice President and Chief Financial Officer.
Our presentation in pre recorded remarks are available on the new Investor Relations section of our website.
To accompany the first quarter earnings news release, which is posted in the same location.
Shortly darin, who will provide opening comments and reference a few slides from this presentation that'll get analysts more time to ask questions before we conclude at 830, a M central time.
During the presentation, we'll make forward looking comments, which are subject to risks and uncertainties. We describe some of them in our cautionary statement here on slide two.
Additional information on the risks and uncertainties that apply to any forward looking statements are listed in our most recent form 10, Ks and 10-Qs available on our website for investors.
Also please note that we provided supplemental information at the end of our earnings slides, which are posted on the website.
Now please turn to slide three for Dan's remark.
Good morning.
Thanks for joining us today.
Following a record year Exxonmobil delivered the highest first quarter earnings in our history.
Even as energy prices and refining margins moderated from the fourth quarter.
This ongoing success reflects the hard work of our people.
Executing our strategic priorities and fully leveraging our competitive advantages.
Our investments in advantaged assets.
Mix improvements.
And cost and operating discipline.
We are delivering the structural earnings improvements outlined in our corporate plan update last December .
And expanding your energy supplies needed to meet growing global demand.
Compared to the first quarter of 2022.
We added about 300000 oil equivalent barrels per day to global supply primarily from a 40% increase in production from Guyana in the Permian Basin.
The increase more than offset our divestments and the expropriation of stocking one.
We no longer account for but which importantly remains part of global supply.
In addition, our Beaumont refinery expansion reached nameplate capacity in the quarter.
This 250000 barrel a day expansion as the largest U S. Refinery addition in a decade.
Helping me societies ongoing need for transportation fuels.
Guyana, we're pleased to announce that we reached final investment decisions for La rule.
Fifth offshore project, which will bring a lot even more production from this low cost low carbon intensity resource.
While we will provide an additional 250000 barrels a day of gross capacity with startup targeted for 2026.
Earnings in our product solutions business benefited from the team's solid operational execution with top quartile turnaround cost and schedule performance during a particularly heavy planned maintenance period.
The low carbon solutions, we're building momentum across several fronts.
In early April we announced a long term agreement with Wendy to capture transport and permanently store up to 2.2 million metric tons of C. O two annually.
Hydrogen, we announced front end engineering and design contract for the world's largest low carbon hydrogen facility in baytown.
The agreement with SK group of Korea for off take of blood ammonia from that facility.
As we said during our low carbon solution spotlight earlier this month.
Our low carbon projects must be advantaged and deliver competitive returns.
The ability of our low carbon projects to compete successfully for capital is important if the world is going to meet its emissions aspirations.
Incentives included in the inflation reduction act very positive step forward.
Although permitting and other regulatory improvements are still needed.
Europe by contrast policy approach remains far more prescriptive and punitive.
This is true whether we're talking about the emissions reductions needed to put the world on a path to net zero four.
For the production needed to provide Europe with affordable and reliable energy.
The progress, we're making across the company is underpinned by the continuing evolution of our business model.
Effective on May one two new enterprise wide organizations will be up and running.
Global business solutions will centralize the majority of our financial procurement operations.
Willing us to deliver simplified corporate wide processes.
Exxonmobil supply chain will consolidate supply chain activities globally.
It organizations will focus on leveraging our scale to drive efficiencies improve operating and financial results and importantly, deliver an improved experience for customers vendors and our people.
On June 1st we plan to launch our new enterprise wide trading organization.
Well, we're trading will bring together expertise from across the company in crude products natural gas power and marine freight trading.
Planned to build on our record 2022 results leveraging the unique insights we gain from participating across each of our value chains and all along their entire links.
With our global operating footprint larger than any of our competitors.
Now let me cover the quarter's headlines we're pleased to have delivered 11 $4 billion of earnings a record first quarter falling a record year.
A significant contributing factor was structural cost savings that now total approximately $7 2 billion.
Keeps us on track to meet our target of $9 billion by the end of this year.
Cash flow from operations totaled $16 3 billion and our net debt to capital ratio declined to 4%.
Further increasing the strength of our balance sheet, while supporting shareholder distributions of $8 $1 billion in the quarter, including $3 $7 billion in dividends.
Quite a dynamic market, our underlying performance remains rock solid and well ahead of our competition.
The many improvements we've made over the last six years and of course the <unk>.
Good work of our people.
Our diverse portfolio of advantaged businesses.
And mix.
Actual cost savings excellence in execution are driving industry, leading earnings cash flow and shareholder value.
Combined with the strength of our balance sheet.
We have the capability to win across a wide variety of market conditions to deliver strong returns.
While meeting the evolving needs of society, including the need to reduce emissions.
Leveraging the capabilities and advantages developed in our traditional businesses.
We're building an advantaged new business low carbon solutions.
Positioning us as a leader in the energy transition.
And our own and others' emissions.
And establishing long term value accretive growth opportunities that will underpin continued growth and shareholder returns.
That let me turn the call over to Jennifer.
Thank you Dan.
Let's move to Q&A as a courtesy to other analysts please limit yourself to a single question that way, we can accommodate more questions from more people also please remain on the line in case, we need to ask any clarifying questions with that operator. Please open up the line for our first question.
Thank you Mr. Driscoll the question and answer session will be conducted electronically if you'd like to ask a question. Please do so by pressing the star key followed by the digit one on your Touchtone telephone.
Well go first to Neil Mehta with Goldman Sachs.
Thank you so much.
Darin.
You've spent a lot of time in the refining business over the years and you've had a perspective on these calls that margins were going to start to normalize it and we're seeing some indication of that but just be curious on your views on what youre seeing in terms of product demand.
And then how do you think it's going to manifest itself through the refining system.
[noise] perspective over the next couple of years.
Yeah, Good morning, Neil a couple of points.
I think as we're looking at the refining margin obviously, the first I would make is.
We don't really pride ourselves on being able to forecast margin saw a caveat everything I say with the recognition that given the impact that demand as on the margins given the fairly static supply side of the equation.
It's often difficult to know exactly where things are going to go but I would say is as you look at where we're at today I mean this is.
Seasonally a low point as you head into second quarter.
And then third quarter and driving season, where you tend to see a supply and demand tightens up and margins improve you typically see early in the year a lot of refining turnarounds, which takes a lot of capacity offline and that lower demand season, and then when those turnarounds are finished and capacity comes back to how you get a surge of supply and so you generally see refining.
Just drop off here.
Kind of this.
Valley between the supply coming back and then demand picking up as you head into <unk>.
Early summer and then on to here. So I think we're in that's important context in terms of what we're seeing right now.
Gasoline demand looks pretty pretty reasonable frankly, I think jet demand in transportation. It looks like it's kind of trending up and certainly from listening to some of our customers in that space expectations are fairly healthy.
Air transportation or airline.
Travel miles going forward in the summer. So I think my view is we're going to see the typical a push up in the summer and see margins rise longer term.
So it comes back to.
What happens in China It has been.
The source of not only demand, but also of exports.
Their exports have been.
Higher in the first quarter, but tends to see how those play out going forward. If we see similar levels of exports as we saw last year my expectation of that'll put additional.
Upward pressure on the margin. So I think you know that's kind of the things to watch the last point I'd make on refining margins, which I think is somewhat structural.
Typically the marginal barrel and refining comes out of Europe , and so that the Europe set is the price setter for global markets.
Ex transportation.
Yeah high gas prices in.
In Europe with I think the potential to go higher you've got high carbon prices in Europe , and so that marginal tier of production.
<unk>.
You know a lot more expensive than it's been historically and that's going to keep I think.
Pressure on higher prices.
For the globe, and therefore, better margins, if you're producing outside of Europe .
Okay. Thanks, so much.
Yes.
We'll go next to Doug Leggate with Bank of America.
Well, thank you and good morning, everyone.
Darren the wonderful I wonder if I could kick off first on disposals or another.
Reasonable contribution from non core asset sales, but can you characterize where you are in that process and what do you think.
You might have stood in front of you in terms of noncore asset sales and I've got a quick follow up.
Sure Doug Good morning, well I think if you look at the plans we set ourselves back in 2018, where we talked about particularly in the upstream increasing our divestments and taking a very.
Thoughtful approach there, making sure that we were positioning ourselves that when the market was right and we had interest from buyers that we had assets ready to sell and divest has worked fairly well we've been I think pretty successful at.
Consistently putting assets in the market and realizing the value of those.
We should hit the.
The objective that we set back in 2018, probably sometime this year.
And then we've got as we continue to work on high grading the portfolio continue to look at assets that we don't see.
Our strategic necessarily or where we see potential value higher value for others, we will continue to.
Feed that divestment.
<unk> portfolio of markets those assets. So my expectation is you know we've got an inventory of things going forward and would expect to see in my mind kind of consistent rate of being out in the market and basically finding seeing if we can find.
Buyers who.
I have a higher higher used for the assets than we do and therefore, a better value in their and therefore space I just would make the final point that you know as we look at the divestments and it is a value proposition we are comfortable with everything we've got in the portfolio is really a question of how do we optimize and maximize the value.
That's been the focus from the very beginning.
Continue to be one so we're not you'll have to sell anything it's only if we find a valuable opportunity to do that.
I appreciate the answer.
I think I can't remember if Jennifer said, one question or one plus one follow up so a risk of pull up very quickly.
Oh delicately ask this question if I may.
Tell if he was on the wires. This morning talking about how picky Exxon would be on M&A I. Just wanted to ask you. If you feel that you need to backfill your Permian position.
Anytime in the future.
Thank you.
Yeah.
Hey, Doug I'll give you this one plus one.
Right.
Is it amazes me that.
Yeah.
The amount of questions that come up in this space, where we I think we've been pretty consistent as we've talked about it we're always looking for an opportunity.
For an acquisition.
And one that grows value and it's got to be value accretive and it's got to be one where what exxonmobil brings to the table actually increases what.
Either company would do independent of one another and so that's kind of I'd say the underlying.
Approach, while we're in a depletion business and we've got to work real hard to continue to bring volume on we're not actually in the market to find volume.
We're in the market to find value and we're willing to kind of let volumes do what they will do in.
In the search for making sure that anything that we bring into the portfolio is accretive and is a unique and unique value contribution for.
For the shareholders and so we're looking we're working really hard on our technology portfolio in the Permian I've talked about that in the past My view is success in technology and.
Developing proprietary technology, which improves either resource recovery or the cost of developing that resource whatever that is wherever value lever our technology can bring to the table that obviously opens up deal space and to the extent that we're very active in the Permian, We've got a really good.
Anchor business, there and we're working real hard on opening up the value proposition of our current acreage with technology that will open up potentially opportunities for acquisitions, but that's down the road. That's work that we've got to demonstrate to ourselves. There is a unique value proposition. There and then my view would be we'll leverage that to the to the full extent that we can.
But I would I'd make the same is true for any of the areas of our portfolio, where we've got.
A substantial business today and ongoing technology work to make advances that's I think really what's going to underpin where we focus our attention.
Thank you.
Sorry, and then as a reminder, we would like you to limit yourself to a single question.
Okay.
And we'll go next to Devin Mcdermott with Morgan Stanley .
Hey, good morning, Thanks for taking my question.
Good morning.
So I wanted to stick with the Permian, but I'm not going to ask an M&A question I wanted to ask about the the results Youre seeing there and if you look at the production in the quarter you guys reported 615000 barrels a day its strong sequential growth versus <unk> and also puts you already in line with that 10% growth target that you had laid out for 2023 I was wondering if you could.
Talk a little bit about the productivity trends and the driver of the strong results that youre seeing there and then also how youre thinking about the evolution of production for the balance of this year.
Yeah, Good morning, I would say.
We haven't changed our year end.
Targets and so the guidance that we gave as part of the corporate plan discussion last year continues to hold I think we've said in the past that.
As you look at production in the Permian is going to be a little bit lumpy and so.
I wouldn't take any one data point any one quarter's numbers and extrapolate from there I think you're going to see.
So moving that up and down I would say generally speaking.
We like what we're seeing in terms of productivity in the Permian.
You all know we several years ago.
So our strategy on maximizing.
Maximizing oil recovery versus initial production rates that led to a very different development approach.
Trying to work across these cube design work across all the benches simultaneously to maximize ultimate recovery that I think we've been developing that approach fine tuning it.
Testing it and evolving that concept, we like where we've gotten to with that approach and I think we're seeing the results of that starting to manifest itself.
Our expectation is that we'll continue to.
I think differentiate our production and what we're able to do versus many of the others. Many of our other competitors who started off on this best bench high initial production rates with time I expect to see them pivot.
Maybe a similar approach, but but I think we've got a real good head start on that like what we're doing there.
I think we see.
There are some encouraging signs on the early stages of that and we're going to keep pressing on that maintain our rigs and the capital levels that we've been talking about pretty consistently and then we'll see how the rest of the year plays out but we are sticking at this point too.
Same year end guidance that we gave late last year.
Great. Thanks Darren.
Yes.
Well go next to John Royall with Jpmorgan.
Hi, guys. Good morning, Thanks for taking my question.
So on the Beaumont expansion can you talk about how the capacity is being absorbed in the market and.
Given what's happened to cracks in the general concerns around demand today and.
Granted I think darrin.
Darrin it's commentary on.
The market was probably a bit more positive but.
Are there any concerns about adding capacity at a time, where fundamentals appear to be weakening.
Yeah.
I would say the short answer is no.
We all know these these markets are volatile.
They move up and down we focused I remind you on the Beaumont expansion. This is something that we began planning and developing many many years ago.
And it was really built on.
The Permian production and the changes.
Transportation differentials by bringing crude into the front end of the Beaumont refinery and making the intermediate products to fill our conversion capacity and backing out imports of intermediates.
And saving the transportation of those intermediates are typically coming from afar and so we justified.
That project on a.
Transportation differential and felt that that provided a reasonable return and with the expectation that on top of that we would see the value of the additional fuels into higher value products that we are producing.
Actually what we're seeing today.
It is very well positioned on the cost of supply curve.
And frankly, that's how you need to think about this business, so irrespective of where the margins go.
Our view is all of our facilities need to be on the far left of the curve. So that we've got a difference between the marginal price setter.
Every expectation that the capacity that we brought on a Beaumont rule.
I know it's on the far left hand side of the cost of supply curve, so feel pretty good about its competitiveness.
Thank you.
Right.
We'll go next to Sam Margolin with Wolfe Research.
Good morning, Thanks for taking the question.
Good morning, Sam.
So.
I think you know looking at the numbers, what what sort of jumps off the page is the cash balance.
You've been pretty transparent about this topic.
And you know the imperative to build a fortress balance sheet, but I wonder.
If the direction, we're going with cash you know even net of shareholder returns that are that are continuing to increase.
And you know that are well within sort of your targets.
If we're kind of getting beyond for Tristan into something even bigger than that and you know if there's any if there's any thought around kind of the absolute level of cash today and really what's optimal and I think I'll, just you know a couch that with historically.
Exxon had kept it very lean balance sheet.
On both sides.
Relative to sort of the production base from a cash flow basis. So it's.
It's a little bit different than than the history of the company and so what I would appreciate your thoughts on that thank you.
I'll go ahead and take that Sam I mean, our capital allocation approach I think it's been very consistent and very clear and we had talked about the fact that we would expect our cash balance post the end of the year to kind of ebb and flow depending on how market prices and margins.
So I'd say, we're very comfortable with where we stand it's important for us to have a really strong balance sheet in order to ensure that you know we stick to our capital allocation.
Priorities through the cycle right that investing in the business and competitively advantaged high return projects, it's maintaining a very strong balance sheet that balance sheet gives us all the firepower and confidence we need to succeed across a very wide variety of market conditions, which is obviously, what this industry faces and then.
Clearly, we're looking to share our success with shareholders and you see that through a more consistent share repurchase program and a growing dividend. So we feel pretty good about our cash balance I would just also mention that we're in.
Relatively unusual market environment compared to what we've seen in the past Exxon.
Exxonmobil as average debt rate is about 3% you can look up what people are Ernie.
On short term cash I think three month treasuries or eight 5% today.
So right now we're not incurring a negative cost of carry on that cash balance and that certainly one of the things that we look at as well. So we feel really good about where we're at today and our balance sheet.
And I would add Sam I think you mentioned history.
In recent history is certainly true that we ran a fairly.
Lean on cash, but if you go further back to some some of the really high cycles, we carried more cash and it reflected of the you know the <unk>.
<unk> cycle and the nature of that typically we're bringing in a lot of cash the top of the commodity cycle, but that's an important.
Asset as you move into the bottom of the cycle.
Particularly when you're trying to maintain them.
The consistent investment levels and continuing to advance the projects into the portfolio. So I think.
And in times, where the markets are.
On the high end of the cycle I would expect to see cash balances higher so that we're well positioned as we go into the low end of the cycle, which we know will come.
Question is Avi obviously win.
So that will come.
Thank you so much.
Yeah.
We'll go next to Roger read with Wells Fargo.
Yes, Thank you and good morning.
Morning, Roger Yes, what I'd like to ask on the.
Specific commentary about the $7 2 billion and savings on track for the $9 billion. This year.
Could you characterize a little bit where that's come from to date.
How kind of general inflation within not just the oil field, but in general how that's.
Affecting that is 9 billion like this at the end of the program or is there something to happen beyond that I know I'm kind of hands asking three questions in one but theyre all focused right around the the seven to nine so.
Yeah, if you will.
If you'll allow me I'll throw that at all.
I'll try and circle around that kind of suite of questions for you Roger So I'd start by saying overall, we feel really good about the progress that we've made we're very much on track for that $9 billion at the end of this year relative to 2019.
If you look overall at where a number of I'd say different programs are driving savings for us.
It is just improving the overall productivity across our workforce. If you think about how that's manifested itself in upstream you know it's been a significant reduction in what I would describe as above field.
Cost that's been a real focus of that organization. We've made a number of different organizational changes over the past couple of years I would describe those generally as looking to centralize kind of key functions across the company that had been done to spirit. Li previously our global projects organization would be a great example of that.
Last year more recently, the combination of our upstream I'm, sorry, our downstream and Cam organization into our product solutions business, you know a lot of simplification coming across that business as a result, combining our engineering and research kind of groups collectively together and then just recently.
Announcing that combination of our supply chain across the organization and setting up our global business services organization and combining our global trading capabilities across the company and so that's all about.
Proving experience for our employees for our vendors to our customers and continuing.
To drive efficiencies and importantly effectiveness across those organizations, we would have seen actually the benefit of some of that in this recent quarter. You know, we talked a little bit in our presentation about the fact that our maintenance activities, we had a pretty heavy turnaround quarter and those maintenance activities.
We came in at the first quartile so much better than what we had planned for shorter duration that enabled us obviously to have better throughput than we would have been planning overall for the quarter and so that's a big area of savings for us and Thats another organization.
That we have recently centralized in our global operations and sustainability group. So that gives you I'd say a little bit of a characterization of what our savings are coming from.
Certainly some of the more recent changes that we've made in the organization, we expect to drive.
The efficiencies and effectiveness going forward from here and then just the last comment like does the program and so just to be clear we've talked about a specific time period externally because we thought that would be helpful and transparency internally, we look we don't actually.
Manage their says Hey, there was one time period that we're focused on as opposed to we are focused on continuing to drive structural cost savings over over time.
Our embedded in the plans that we shared with you last December and obviously, we'll be doing an update when we come to the end of the year until we will talk in more detail about what we see from there on a go forward basis.
Okay.
Final point I'd make to build on what Kathy said is we have seen with all these organizational changes.
Our people have come together and the new organizations and focused on the objectives of those organization and what the corporation is trying to achieve we fine.
A lot more opportunities than we could envision even going in.
Two the changes so my expectation is as these new organizations come together they'll begin to find things the organizational changes we've already made our continuing to find things. So our expectation as you head into the future as we will continue to.
Drive.
Efficiencies and deliver structural cost savings onto the bottom line.
And then I'll just circle back you asked a little bit about inflation.
We actually have put an additional disclosure in our press release. So I'd encourage you to look at that if you look at the quarter.
More than offset inflationary cost pressure with the structural savings that we were able to generate overall I'd say the organization is doing a good job at looking to offset inflation and what's obviously been a higher inflation environment recently.
Thank you.
Okay.
We'll go next to Jason <unk> with TD Cowen.
Hey, good morning, Thanks for taking my question I wanted to ask a question on the downstream business and given your global reach there are where.
We're seeing reports that Asian refiners are contemplating run cuts while margins in the U S are still really robust and I'm wondering if you see that dynamic is kind of balanced where cracks in Asia are zero, but margins in the U S are still 'twenty and that's.
Kind of representative.
The market structure that we're in or do you expect the weakness in Asia margins to kind of force U S refining margins lower in the near term. Thanks.
Yeah sure I'll take that I think you know the first comment I would make is.
Over some period of time, it's typically pretty short the world.
Balances you know, we always we always use the phrase the world is round so it's hard to stay.
Disconnected with the.
The margins eventually have to equilibrium on transportation differentials and so that's the model that I have in my mind. There are always short term disruption as you certainly saw that coming out of the pandemic. So some of the logistics constraints. So there will obviously be periods of time, where the where things constrained that but generally speaking that happens I think the margins and the.
U S will be a function of you know.
What production sources setting the marginal ore production.
As I said earlier that has historically come out of Europe in there their cost structures have increased and so that marginal barrel is now higher which is underpinning higher Gulf coast refining I don't frankly see that changing in the short term.
Obviously and you know if additional capacity comes on it's much lower cost and that supply overwhelms any growth in demand and we will see the marginal price setter change and then with time.
That will get balanced out based on transportation differentials.
My sense of things as you know if you could look back to last year and the export levels.
Coming out of China, and the balances in Asia that that stayed reasonably tight question will be well see the same thing this year and I think time will tell.
Alright. Thanks.
Yeah.
We will go next to Stephen Richardson with Evercore ISI.
Alright. Thanks, this maybe a bit of a follow up on the questions previously about cost structure and the balance sheet, but I was wondering if you could just address how and remind us how youre thinking about.
Dividend growth rate, because we've got you know clear.
Clear evidence here that you've got you know foundational earnings growth you've got projects that are coming on sooner and bigger if you look at Guyana, the Permian is doing well.
You're adding base capacity downstream. So I'm just wondering if you could remind us sort of on a mid cycle basis, how to think about and how the board thinks about dividend growth because certainly you've derisked some of those foundational earnings.
Yeah, I'll start and then I'll hand, it over to Kathy to.
Build on them, but I would just say generally as we think about the dividend.
We tried to keep the long term in mind and also be extremely conscious of the commodity cycles and the variability and the volatility that we see in the marketplace and making sure that we establish a level of dividends that are reliable.
Sustainable and I'd like to see those grow with time, that's been our history.
What you've seen us do and you see US fight certainly during the pandemic year fight really hard to make sure that we sustain that and that's it.
Our commitment to it I feel.
Really strongly about and so it's really about making I'm.
Making sure that what we do there is sustainable for the long term and then obviously, we can balance disbursement shareholder disbursements with.
Buybacks, but.
I think maintaining a long term perspective, and making sure our shareholders feel rewarded through the dividend policy is an underlying principle Kathy you want to add anything that I would say, we look to take a very balanced approach as we think about shareholder distributions and getting that balance between a growing competitive dividend right as well as the.
Efficiency through share repurchases and I think we're striking a pretty even balance in that regard and we definitely think about that over the long term as opposed to the near term given we're in a business that's highly cyclical and so you.
C notes in the last two years raised the dividend in the fourth quarter of the year.
Never going to get out in front of the board of directors and it's obviously something that we look at regularly and we know it's important to ensure that dividend is competitive and growing and about 40% of our shareholders are retail shareholders.
You know more of the moms and pops across the globe that.
Our investors and so we know it's important and something we're really focused on.
Thank you very much.
Yep.
We'll go next to Ryan Todd with Piper Sandler.
Yeah.
Great. Thanks.
A question on the chemicals business you saw a sequential margin improvement in your chemicals, probably products business driven by advantaged ethane pricing.
Have we turned the corner and in chemicals environment and can you talk about how you see the trajectory of margins in that business over the course of 2023.
Sure I'll start that and Kevin you got anything to add to it I think.
These.
Like all of the businesses that we're in the underlying drivers of the chemical.
The margins tend to be the commodity chemicals that are driven by.
By supply demand and the balances are imbalances in supply demand.
The margin we saw a lot of <unk>.
Capacity come on you remember as we went through the pandemic a lot of investments that got stalled and pulled back and then as we came out those got.
Turn back on again and come onto the marketplace. We've seen a lot of capacity coming on as expected expect we'll still see some of that come on here in the short term and then in conjunction with that.
Covid impacts took a while for it to unwind through the what I'd say is that the global economy, which impacted chemicals demand. As you know is very tied to economic activity. So if economic activity is constrained in the chemical demand is constrained and we certainly saw that with the China Lockdowns, where we're at now is that capacity is out there at all.
Sean.
And it's just a question of where demand goes in.
Frankly, I think it's early with China, we do see some promising signs, but we'll have to see how that how China demand and their economic activity picks up the other point I would make is.
Feed and feed optimization is a big part of the margin equation as well we've got some fairly.
Diversed assets with respect to the ability to to manage feed and change feedstocks around as gas prices came off.
That gave us a better liquid to gas spread that allowed us to change some of our feed into our crackers and see the advantage of that so that was a help in the first quarter some of that feed optimization and that will play into it as well and I think that's what you saw in the first quarter and then the more macro.
Impacts we will see how they play out as we go forward Kathy anything yeah. The only other thing I'd add is we obviously brought on our Baton Rouge chemicals expansion project late in the fourth quarter that Spooled up in the first quarter, you know that part of an overall strategy of growing performance chemicals, along with growing high value products.
Our product solutions business be at performance chemicals, or low emission fuels high value lubes and so even though the market has been tough that project actually had a positive earnings and cash flow contribution for us in the quarter. So that's a big part of our overall strategy and mixing up in.
Both the chemical business and across our product solutions business and we feel very good about the results that's bringing in you know we are.
We have an advantage in a very heavy U S Gulf coast footprint kind of relative to that global footprint and that helped us in the sequential improvement in margin.
It's a great. It's a great example of where we're focused on advantaged.
Projects that bring on advantaged low cost capacity, so that polypropylene unit that we brought on.
Really what is a pretty low point in the probably in polypropylene.
Market to make.
To make earnings positive earnings on a brand new piece of kit that starts up in the lowest of the cycle is a I think a testament to the strength of the projects that we are investing in and bring it online.
Thanks, Darren and Kathy.
Thank you.
Okay.
We'll go next to Alastair Syme with Citi.
Hello.
Kathy.
I wonder if I could disaster.
Depreciation trends, it's quite a big change.
With a full quarter of depreciation.
The portfolio effect that we should be picking up.
How does that rate through the year.
Sure I'm happy to answer that you know what you tend to see in depreciation as some ebbs and flows associated with our asset management activities and so when we're selling assets, sometimes we're taking a small impairment that runs through depreciation and so I'd say you kind of have to take a step back.
From that noise in depreciation if I put that to the side. The company has run about I'll call. It 19, 20 billion annual annually and depreciation and amortization. So that's how I'd think about it.
Okay. Thank you.
We'll go next to theorize bore Qatar you with RBC.
Hi, Thanks for taking my question I, just wanted to follow up on trading.
Because there's been there's been various press reports about X I'm wanting to build up its capabilities.
Optimization and trading and I was just wondering where you are in that journey, because obviously we've seen.
Some exceptional volatility in 2022 and the early this year across oil and gas I mean, if I look at some of the numbers from some of your peers.
It looks like that those businesses the asset optimization could add up to 5% on Rosie and an exceptional environment. So.
You, obviously have a big advantage with your refining footprint in your asset base I'm, just wondering how are bigger.
Vigorously pursuing this opportunity.
How long do you expect it to take to get to where you want to be on the trading front. Thank you.
Sure and good morning Raj. Thanks for the question I think.
Putting aside the press reports of the media we've talked about this I think starting back in 2018.
What triggered our emphasis on China.
Trade in and the emphasis that we're putting on trade.
Is the reorganization that we made coming out of the functional organizational construct into value change as you move into value change the opportunity to trade along that value chain.
And generate insights and advantage along that value chain changes pretty dramatically and so that moved to a value chain construct that we had early on between refining and downstream.
Don't have that with our product solutions organization, we've now integrated our upstream into this value changed and so we've got a.
It really streamlined and.
A good view of the marketplace and so we can now trade all along the entire linked to the value chain, we can shape trade across those value change then obviously, we can take advantage of our global footprint as you referenced.
Trade along that global footprint, an arbitrage between the markets and so I think.
Our organizational construct today gives us a much better line of sight and opportunity to optimize in the trading space. So we started growing that in 2018 that has been.
But I would say is on a.
Continuum of growth.
We like what we see there we like we brought talent in there. We've had we've had we've traded for a long time, we just gave the trading organizations within the companies from different objective statements and they've done really well responding to that bringing value to the bottom line and what we just announced is taking the trading organizations that today are.
Somewhat dispersed through the organization and consolidating those into one centralized trading organization for the whole Corporation, we think that makes a lot of sense.
He did a lot of work.
Over the last couple of years to validate what we thought the opportunity size was there and what would be needed to get after that and we're now I'd say in execution mode with respect to <unk>.
Putting the organization together, putting in the support systems are bringing in the talent and developing the talent and growing the talent in that space and so I would just think of it as it.
A progression a continuation with what we believe is huge opportunity and we're going to do that in a very thoughtful.
Controlled pace, but one that is very focused on significantly growing the value proposition there really around our footprint. This is not about going out and taking speculative positions. This is about going out and optimizing given the asset base that we have the value chains that we're participating in taking the insights generate.
For marine those businesses and the opportunities that come with those insights and transacting on them. That's what the organization is going to be doing and like I said, even in the short time, we've seen some really good results.
I think we've got a clear line of sight to some additional ones and that the value of that opportunity will manifest itself in our business.
But the this is really around trading on the value created through the transformation of molecules in developing products that people want and then moving those products around the world and so that platform gives our traders a great base to optimize off of that's where we'll see the value accrue.
That's very helpful. Just if possible I got a quick follow up but does that change.
All the way you look to manage your cash balances going forward and figured out relative to prior cycles. If you have a higher kind of exposure to trading.
Maybe you would like to run with a high cash balance Germany up Mike.
<unk> role in that or is there is any.
Any color would be helpful.
So we obviously take the Companys working capital needs into consideration as we think about our balance sheet and our cash balance.
All else held equal.
A bigger company means a bigger working working capital needs. So that's how I would think about it I would also say as it relates to trading generally I mean, there are some near term I would say working capital that has to be brought in mind in terms of their trading organization.
Profits that come through trading are different.
Different quarter to quarter, but I'd say year to year pretty steady.
Got it thank you.
In Q.
We'll go next to Paul Cheng with Scotiabank.
Alright, Thank you good morning.
Good morning, Ken can you give us.
Thank you can you give us an update where you are all yes, some b.
And also the Papua New Guinea LNG.
In terms of the Papa New Guinea is the expansion talk.
Yes, I think just I'd speak to maybe the LNG portfolio as a whole.
Making good progress there.
I would say.
Specifically.
And working through a project concepts and designs and making sure that we're.
Developing projects that are going to be on that left hand side of the cost of supply curve, bringing on production.
Very competitive in the marketplace to make sure that for the long term, we have a robust robust.
Supply point, there I think a good progress in both PNG and Mozambique with respect to that we've had good progress with with the government in PNG in terms of getting.
Getting the agreements that we need signed in.
Helping us move forward working with our partner there to hotel and so feel good about the progress that we've got there we're making there and then with Mozambique, obviously been on hold for a while.
Given some of the challenges there.
And we will continue to keep a close eye on that and as the situation improves and we feel comfortable that we can successfully go in there and develop the project will will take the steps to go do that in conjunction with <unk>.
Hotel and the work that they're doing there.
Darren can I ask some upbeat hotel seems to be optimistic.
Security on the ground just looking forward to.
On the cost structure with the contract and do you guys still have concerns or security or that youre going through the.
So Tom on the cost structure side.
So we worked very closely with hotel obviously.
Given the same exposures and the work that we're doing there together so.
Tell you, it's kind of a hand in hand approach that were taking their sharing information we've had our own security folks after assessing the situation I would say our assessment is very consistent with hotels assessment.
We don't see a lot of difference between what the conclusions that are coming up with and our conclusions. So we do like the progress that we've seen there obviously, we need to be convinced that that will sustain that progress and today I feel pretty optimistic about that.
Thank you.
Welcome.
Okay, I think that that completes our Q. So thank you everybody for your questions. Today, we will post the transcript of our Q&A session on our new Investor website in a few days. Additionally, we look forward to connecting again on may 31st for our annual shareholders meeting have a nice weekend everyone.
Now, let me turn it back to the operator to conclude our call.
This concludes today's call we thank everyone again for their participation.
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