Q1 2023 Chevron Corp Earnings Call
Yeah.
Good morning, My name is Katie and I will be your conference facilitator today welcome to Chevron's first quarter 2023 earnings conference call.
At this time all participants are in a listen only mode. After the Speakers' remarks, there will be a question and answer session and instructions will be given at that time, if anyone should require assistance. During the conference call. Please press Star and then zero on your Touchtone telephone.
This conference call is being recorded I will now turn the conference call over to general manager of Investor Relations of Chevron Corporation, Mr. Jake Spearing. Please go ahead.
Thank you Katie.
Welcome to Chevron's first quarter 2023 earnings conference call and webcast I'm, Jake Spearing General manager of Investor Relations, our chairman and CEO , Mike Wirth and CFO Pierre <unk> 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.
Now I will turn it over to Mike.
Alright, Thanks, Jake Chevron delivered strong financial results again last quarter, the seventh consecutive quarter with return on capital employed greater than 12%.
This enabled another record for cash returned to shareholders, while maintaining a strong balance sheet.
Since our Investor day, two months ago, we remain focused on executing our plans.
Moving important milestones on our project in Kazakhstan, continuing to build activity levels in the Permian.
Positioning <unk> to be one of the largest carbon storage projects in the United States and safely and reliably delivering oil products and natural gas that help power the global economy.
Next week, we will publish our corporate sustainability report.
Courage you to review it on our website as we provide updates on the ESG topics that matter to our business and our stakeholders.
In closing.
While commodity markets remain uncertain.
Our approach is unchanged.
Capital and cost discipline.
Applied to advantaged assets in both traditional and new energy businesses and steady returns of cash to shareholders.
You can see that consistency interactions and our results.
Now over to Pierre to discuss the quarter. Thanks, Mike We reported first quarter earnings of $6 $6 billion or $3 46 per share adjusts.
Adjusted earnings were $6 $7 billion or $3 55 per share we.
We had one special item this quarter.
Related to changes in the energy profits tax in the United Kingdom.
The appendix of this presentation contains a reconciliation of non-GAAP measures.
Strong operating cash flow enabled chevron to deliver on its financial priorities during the quarter at.
At 6% per share dividend increase higher capex within budget net.
Net debt ratio under 5%.
Share repurchases at the top of our prior guidance range.
Adjusted first quarter earnings were up over $200 million versus last year, despite 20% lower oil prices.
Adjusted upstream earnings were lower mainly due to realizations and adjust the downstream earnings increased primarily due to higher refining margins.
Both segments benefited from a change in timing effects.
Higher interest income and lower accruals for stock based compensation decreased all other charges.
Compared with last quarter adjusted earnings were down $1 $1 billion.
Adjusted upstream earnings decreased primarily due to lower realizations.
Other items include the absence of last quarter's dividend withholding tax that T C O and lower exploration and transportation expenses.
Adjusted downstream earnings were essentially flat.
Lower margins and volumes were offset with higher chemical earnings and other favorable items, including trading results.
Lower accruals for incentive by incentive based compensation decreased to all other net charges and also benefited the operating segments.
First quarter oil equivalent production was down about 80000 barrels per day from last year due to the expiration of a contract in Thailand, and the sale of our Eagle Ford asset.
This was partially offset by growth in the Permian.
We expect 2023 production growth in the Permian to be backend loaded as wells put on production Pops increase across both operated and non operated areas.
We expect our royalty production to be roughly flat.
As discussed during our Investor day, we're increasing activity in new Mexico.
All four company operated rigs added this year, one each quarter will be in new Mexico, leading to more pops expected in the second half of the year and into 2024.
We also continued to be active in Texas.
Last year about half of our company operated production was in the Delaware Basin in Texas with the remainder split about evenly between the Midland Basin and New Mexico.
More than half of our non operated production is with five major operators and large contiguous positions in core areas of multi year development programs, where we have visibility to capex and execution schedules.
And a royalty benefit compared to the operator.
The balances with dozens of other operators, where we have a little less visibility, but similar predictability from greater diversification.
More than half of our royalty production comes from the Pecos River area in the heart of the Delaware Basin the.
The balance of our royalty position is in the remainder of the Delaware and Midland basins.
So with well known operators.
In summary, Sherman has a large diverse position in the Permian with a unique royalty advantage.
Where we learned from our own operations and from others.
Now looking ahead.
In the second quarter, we expect plant turnarounds at Gorgon and in the Gulf of Mexico, along with downtime in SSO in Thailand, and a number of planned refinery turnarounds.
Also we expect share buybacks to increase to a $17 5 billion annual rate.
In summary, <unk> was another quarter with strong financial results.
Continued capital discipline, and a steady return of cash to shareholders.
We're confident that consistent and straightforward management.
Through commodity cycles will create value for stakeholders back to you Jake.
That concludes our prepared remarks, we are now ready to take your questions.
Please limit yourself to one question and one follow up.
We'll do our best to get all of your questions answered.
Katie Please open the lines.
Thank you if you have a question at this time. Please press star one on your Touchtone telephone you May ask one question and a follow up question. If your question has been answered or you wish to remove yourself from the queue. Please press star two if you are listening on a speaker phone. We ask you. Please lift your handset before asking your question.
To provide optimum sound quality again, if you have a question. Please press star one on your Touchtone telephone. Our first question comes from Devin Mcdermott with Morgan Stanley .
Hey, good morning, Thanks for taking my question.
Good morning Devin.
Good morning, So there were some helpful detail in the slides in the remarks on the breakdown of Permian operations. If I look at the quarter. Your volumes did fall a bit sequentially in <unk> versus <unk> I was wondering if you could just talk a bit more detail about some of the drivers there how things are going as you ramp new Mexico activity and Thats typically the confidence do you have in that back half weighted production.
Yep.
Yeah. Thanks, Thanks, Devin appear tried to show a little more detail, including breaking out a co op and or JV and royalty.
Talking about drilling activity and.
Feet drilled et cetera, so I'm glad that that was helpful.
First quarter performance.
Was a function of.
Really the fact that <unk> JV and royalty production, which as you can see from that chart is as you know.
A meaningful portion of our overall production was.
It was down a little bit from fourth quarter of last year.
No.
This gives a little little lumpy due to how it gets reported by partners and.
And so you know overtime, it's trended up.
Particularly the N O J D piece.
Oh it.
It was a little lumpy and it was down first quarter versus fourth quarter last year Coop production was mostly flat from from <unk> of last year to first quarter of this year.
In terms of the full year outlook on slide nine.
We show full year outlook.
770000 barrels a day.
22 was a little bit over 777 I think.
Our co op production will grow in the mid single digits.
<unk> JV, we expect to grow in the mid teens.
And royalty as is roughly flat.
Year on year is our expectation so.
That kind of lays out the first quarter and we still think that the guide we've given is appropriate as Pierre said.
Backend loaded so.
We'll be updating each quarter on that.
Got it makes sense, thanks, and my follow up is on Tcl when it's exciting that we're now less than a year away from startup there and back at the Investor Day. You noted that you had shifted to commissioning and startup work for W. P. M. P. I was wondering if you can just give us an update on how things are going their latest expectations on timing and then also the <unk>.
Key milestones that we should be keeping an eye out for for the balance of this year had a startup.
Yeah, absolutely I actually was in Kazakhstan earlier, this month I had a chance to meet with.
The president of the Republic. Some other senior officials and also spent time down at Tengiz and visited the job site talk to both people from our construction team people from the commissioning team people from operations as we're preparing for startup and and I'll tell you it looks a little less like a construct.
<unk> side, a little bit more like a plant than it did the last time I was down there. So the progress is very obvious.
Yeah.
You know the headline I'll give you is there's no change to our cost or schedule guidance.
We expect.
W. PMT startup to begin by the end of this year.
The conversion of the field from high pressure to low pressure so that will take.
Some time as we take all the metering stations in field infrastructure down to low pressure, but that will still begin by the end of this year and the startup of the.
Future growth projects, a portion of that adds 260000 barrels of oil production that we'll begin by mid next year.
Both of these require a series of turnarounds and tie ins and things like that so it's quite a quite a complex set of activities to get us to the point, where we've got everything online, but theres a lot of work behind us while I was there.
We achieved mechanical completion on the third generation sour gas injection.
Facility, which was ahead of schedule and and there were a number of milestones that I mentioned, we talked about at the Investor day.
That we've achieved so you completed tie in of the fuel gas system to the first gas turbine generator, we fired that generators. So we know that it's working.
In the second quarter in terms of milestones to watch for.
We're working to commission boilers steam system. Other utilities that are required for the startup of the pressure boost facility, which is the key driver of that conversion from high pressure to low pressure field operations to enable.
<unk> well deliverability.
In the third quarter, we expect medical mechanical completion of the future growth project.
And and then as I said, we'll begin start up activities on the field conversion to low pressure by the end of this year. So.
Those are some of the key milestones and like I say a.
A lot behind us, but there's still a lot of complex work ahead, we'll be updating you on it every quarter.
Good to hear thanks, Mike.
Alright, thank you.
We will take our next question from Neil Mehta with Goldman Sachs.
Yeah. Thank you so much might compare to the first question is just around the LNG portfolio a lot of volatility.
In the global gas markets over the course of the last year just be curious how you guys are seeing the outlook and.
Any updates on that on your portfolio, particularly down in Australia.
I recognize you're going to take into maintenance, but it seems like it's happening pretty well.
Sure.
So.
Look overall, it's been a bit of a wild ride in the gas markets over the last year.
We've seen you know prices are extraordinarily strong if you go back three years ago, they were extraordinarily weak and they've certainly moderated now as we've had.
Armour weather.
In the northern hemisphere through the wintertime as the situation in Europe has I think become a little more stable certainly inventories both in Europe and in the U S. R.
<unk> healthier than people were concerned about it at one point in time and so you know we're into a market that still is perhaps strong by historic standards, but certainly not nearly as strong as what we saw.
Operations at Gorgon and Wheatstone are are running very well, we had a record number of LNG cargoes go out of Australia last year, It was 10% better than the best year, we've ever had.
Reliability was first quartile for the two facilities.
And in <unk>.
So we feel good about that we've started or.
This year, we will start the second turnaround cycle, which is a four year cycle to turn trains around Gorgon train one.
We will have a major planned turnaround in.
In the second quarter of this year.
And of course, we're working on.
The next stage of field development to continue to keep the field full with wells drilled and in startup.
Activity Italian activity et cetera underway on.
On the.
The next phase of the gas developments to bring that into into the facility. So.
Things and things in Australia are good from an operational standpoint, and a reliability standpoint.
More broadly speaking you know we continue to look at opportunities in our LNG portfolio.
Beyond Australia.
Certainly we've talked.
It seemed like about the eastern med, so I won't belabor that.
Sure.
Looking at.
<unk> concepts and expect to select a concept on Leviathan expansion by the end of this year.
In Equatorial Guinea, we're looking at.
<unk> to bring additional gas resources and through existing infrastructure. So.
We continue to be very focused on what we can do to add value in our LNG business, but to do it in a way that's returns accretive.
Yes, that's good.
And then the follow up as.
It is just on that return of capital and.
You know I think you guys have been pretty clear about the range that we should be thinking about from a from a buyback perspective.
On dividend growth.
Talk about how do you expect that to track relative to your free cash flow per share expectations.
Yeah, you know I.
I think we have been clear on buybacks, so I won't spend time on that on dividends.
I would say our track record.
Should speak for itself of course. These are decisions that are made by the board each.
Each year, but we've got 30 seconds 30.
<unk> 36 consecutive years now of higher payouts over the last five years.
Our dividend growth per share has been double that of our closest peer. So so we've sustained this not over the long haul, but also in the short term through the volatile peer.
Period of time that we've seen.
Our dividend track record I think stands stands very well.
You know reiterate our four financial priorities, the first of which is to sustain and grow the dividend.
As I just mentioned, 6% increase earlier this year at a compound annual growth rate of 6% over the last 15 years. So.
You know I think you know.
Again, I'll say, our track record on the dividend speaks for itself.
I think Pierre mentioned that.
This quarter, we just closed.
Included the highest ever.
Cash distributions to shareholders for the fourth consecutive quarter that we can can say that and and and we're very mindful of.
Continuing to deliver cash in a in a predictable and consistent manner back to shareholders through both of those vehicles.
Yeah. Thanks, Mike.
Yeah.
Okay, Neil Thank you.
We will go next to Roger read with Wells Fargo.
Yes. Thank you good morning.
Maybe come back to the Permian, a little bit I know, you've been providing us a lot more detail on things and I appreciate that.
The detail for the overall production breakdown in the U S but.
Looking at the Permian the Chevron operated portion versus your JV non op.
We think about some of the.
The snags that had been hit over the last couple of quarters.
Where have been the biggest problems is it been in the operated or non operated and then as you think about correcting those over the next couple of quarters, how much of that is chevron control versus partner.
Yeah, So I will speak to our operated operation because I really can't speak on behalf of the others. They should speak on behalf of their operations, we certainly learned from those but we spent ah.
Pretty good amount of time at the Investor day talking about the learnings on.
Our drilled but uncompleted wells that had set for a long time talking about the prior.
Basis of design for the wells, including spacing and proppant loading.
Talking about multi bench development and we've learned a lot from our own operations and those learnings are augmented by the things that we learned from others and so we talked about more single bench development more activity in new Mexico. We continue to be very focused on driving strong returns and not optimizing to production or <unk>.
Some other other metric.
Just to give you a little bit more.
<unk> Roger for this year in terms of how to think about it you know we expect royalty production to be roughly flat.
Who would have a little.
But over 100000, maybe 110000 barrels a day most of that comes from the Pecos River area.
Where we've got big operators.
She is the largest operator in that area, but others that are well known operators in that area.
And then we've got some that comes in from the Midland as well from from Big operators, where Theres a lot of visibility into what their plans are.
Our co op production growth, we expect to be mid single digits for the full year, maybe a touch higher than the midpoint of single digits.
And expect a roughly a 190 wells to be put on production this year.
Which is down a little bit from last year, maybe 10% from last year when our co op production increased 35000 barrels a day.
We've had growth in the Texas side of the Delaware earlier in the year, the new Mexico side later in the year, which follows the chart peer showed you with drilling a.
Lateral feet.
And then in the N O JV.
Our growth is higher it's in the mid teens for the full year the.
The gross number of pumps.
In our N O jv's are expected to be up about 15% year on year and it's interesting our net pops actually increase more than the gross because we have relatively high working interest and a significant royalty advantage in the non ops and so.
A 15% increase in gross Pops actually translates into more production than you might you might presume we've got really good visibility into the execution schedule. We've received more than three quarters of the fees for this year's activity and operations have actually begun at more than three quarters of the JV wells that we expect to be.
Part of this year, so it's a mix we've got.
Really strong, but also a bit of a.
Complex portfolio because of these three different contributors and and we're continuing to hold the guidance as I said earlier about 770 for.
Full year.
No that's great I appreciate that.
Follow up question I suspect is for you Pierre.
Working capital, obviously tends to be a.
Draw in Q1, you've got the.
It sounds like a decent level of planned maintenance in Q2, so just any thoughts on how we should look at overall cash flow generation in Q2, and maybe rest of the year in terms of the cadence.
Well in terms of working capital Roger the first quarter. As you said was a build in working capital draw on cash and that was primarily inventory related.
If you saw last year, we had <unk>.
Draws on working capital and that was primarily through taxes payable and youll see in the second quarter.
Some of those payments happening now we try to give.
Everything excluding working capital because over the.
Of course of time, you know that tends to zero out and there is a pattern, but theres some variability around it. So that's the guidance I would give on you in terms of free cash flow. It depends on you know and cash from ops depends on commodity prices and margins. I mean, we gave a lot of that during our investor day, and some upside and downside cases, but in terms of working capital.
You'll see timing effects, we try to look through them.
And exclude them and then next quarter, you should expect some large tax payments, which will be.
Obviously a draw on cash.
Okay, great. Thank you.
We'll take our next question from Paul Cheng with Scotiabank.
Hey, good morning, guys.
Good morning, Paul.
My tongue.
FTE client Portschach, Tim tooth characteristic that we have different return and dividend Paypal pivot quite team at that I think management input. So for you on low carbon.
<unk> not those that quarter only mission.
Indication <unk>.
But that in terms of like CCA USA is a new business.
That type of business that what is the minimum internal rate of return and payback period that we assign in order for you to sanction the projects.
Yeah, Paul look the reality is these are brand new businesses.
And we've got a lot of confidence in the returns and payback.
Periods that we expect out of businesses, we've been in for many decades and understand very well and well established markets. These are businesses that are that don't exist today. They are in part enabled by our government policy the rules of which are not yet fully written and the durability of which.
We need to ask ourselves questions about as we commit capital to it so they're different they're very different.
Our goal over the long term is to get similar returns out of these businesses as we get out of our core business and so that would be double digit returns.
In the in the midterm to the near term we're gonna have to go into some of these things that offer high growth and an opportunity.
With our eyes wide open, but also understand that as we establish them in the early days.
We may not see the returns that we expect in the fullness of time, so we make big investments our expectation is over the lifecycle of these investments we're going to deliver those kinds of returns.
But we're also mindful of the fact, we've got a we've got to develop technology. We've got to scale. These things we're gonna help markets mature we got to build operational experience, we've got to build risk management experience.
Apply chain and customer capabilities in these businesses and so in the near term will be.
You know understanding of the fact that the returns in the short term will probably look different than our long term expectations, but we won't go into the things that we don't believe offer the long term prospect for returns, which is why we have steadily avoided more well established sectors like wind and solar.
Where we could go into those today because the risks are better defined but we also understand the returns and so if we were just trying to do these kinds of projects. We would go into those but they don't offer the kinds of returns we expect out of the things that we're working on.
And the second question is that your largest U S competitor, just announced that they're going to.
Push more aggressively into trading and establish a single trading organization and.
Think that that's a CMO.
One off opportunities.
Opinion, the market that they can capture essentially ticking Nathan that someone will pay.
Well both of them.
Thats painful from Q1.
I think chevron has always been an even more conservative on that so do you think that opportunity when it comes to me and I'm not too sure that happened Manav global reach at normal physical out there and have a more niche edge Olga.
<unk>.
Is that an opportunity that we may be missing that question Paul.
Well, Paul what I would say is I think maybe your perception is a little bit Miss calibrated from what I would describe we have always had a a global trading organization for many many years I used to run it.
Peer used to run it and and so we're in active.
Trader, we trade in a certain way and I'll give you. The three word kind of overarching description, we flow optimize and trade. So the first role of our commercial organization is to ensure our barrels and molecules flow to the market. The second is to optimize assets ships market positions market knowledge and be sure we get the most valley.
Are you out of our system that we possibly can and then the third responsibilities to trade and we do third party trading we do.
You know.
What we call quad for trading.
On a regular basis, we make money at it and we are very talented people in our organization to do we also have good risk management systems.
To ensure that we understand what we're doing so I wouldn't describe us as not being a trader and.
If theres a definition I think used the word conservative look where it were a trader.
But we do it in the order that I, just described and have done it for a long time on a on a global basis. So its a contributor to our earnings.
And we continue to look to grow that part of our business. The only thing I would add to Mike's answer is sure.
Shareholders and investors don't own Chevron are like companies for trading.
Earnings they tend to be volatile I think the multiples on trading earnings historically had been very low in fact, most of the large trading houses are private companies. So Mike described exactly what our strategy is it works within the framework of a resource company and a refining and petrochemicals company, where investors are owning us for safely and reliably.
Lively delivering energy, having the commodity price exposure and yes, if we can enhance that with trading results, that's great, but we're not going to lead with trading thanks, Paul Okay.
Thank you.
We'll take our next question from Sam Margolin with Wolfe Research.
Good morning, Thank you.
I just wanted just a clarification question on something you said about the Permian because I think it's important.
And the NR JV.
Because your stack royalties with the energy and our JV acreage.
Growth rate in the N O JV portion actually exceeds the growth rate of your partners as they reported is that that's the correct interpretation right. That's what we're trying to communicate.
Okay.
Yeah, I mean, our because we not only get our working interest production.
Out of that but because we also have and we have relatively high working interest in most of our these venture. So it's not dissimilar to the working interest of the operator in most cases, but then we also have royalty advantage when we and we account for that or we report that to you through.
N O JV, what we describe as royalty barrels are pure royalty. We've got no capital. We've got no working interest we're just collecting a royalty as the landowner, but youre correct. In your interpretation. There Sam is that is that is why.
Our N O JV is has grown a little faster than our coop production for the same levels of activity.
Okay.
Thanks, and then just as a follow up this is on capital allocation.
And understood that you have the range out there in the buyback with the ranges.
It's pretty substantial and there is a decision to make right now about.
Where would it be within the range about whether to preserve cash for an opportunity that might come in in a downturn. If that's what it looks like it's on the horizon or whether to stay at the top end because we're in sort of a market equilibrium in the in the commodity environment and you feel good about the pace and I'm not asking you to.
<unk> future, but it would be great to sort of hear your thoughts directionally about.
The value of kind of preserving cash on the balance sheet for a rainy day or maintaining maintaining a faster pace.
Yeah, I'm going to invite Peter to say a couple of words, but Sam we tried to lay out a couple of cases at Investor day that showed you.
In two different price environments.
What our capacity was to to operate and be within the range.
And then with the with a very low net debt low debt levels that we have we've got plenty of capacity Pierre maybe you can just give a thumbnail recap on the scenarios to bookend them for Sam.
Yeah in our Investor day, we looked at the high case and low case scenarios in our guidance right now.
Is towards the high end.
And let me just first be clear that we don't intend to hold 15 plus billion dollars of cash on our balance sheet. We can run the company at four 5 billion and this is surplus cash and this is cash that is temporarily on the balance sheet, it will be redistributed and redeployed to shareholders overtime depending.
On the scenario and the price of both scenarios had is working down that surplus cash because it's economically inefficient for us to hold it and it's not our cash it's our shareholders' cash we want to return it.
Through the cycle in a steady way not pro cyclically. So that's why it's accumulating we paid off all of our debt economically, but it's a timing effect and we've showed certainly in the low side case.
Which averaged about a $60 Brent that we can continue buybacks near the low end.
Of the range and we can do that on by taking surplus cash down and then also using some of our excess debt capacity, because we were well below our $20 to 25% net debt ratio. So we'd want to work towards that low end of that guidance range of 20% again to get to a more efficient.
Capital structure in terms of keeping cash a rainy day or strong we're always going to maintain a strong balance sheet. We've been in this business for decades and decades, we know the good times don't last we know that.
Prices are cyclical we want to manage that volatility for our shareholders. So our shareholders don't have to worry about.
The commodity price because theyre going to get the dividend that Mike talked about that's been growing for 36 consecutive years, that's grown 6% annually for 15 years and they're going to get that and then through a cycle as we approach a cycle. We're looking at the cycle coming up here additional cash in a steady way right now about 5% of our shares outstanding through the form of <unk>.
Buy back and so that's how we're planning to manage the volatility for our shareholders and we've talked about.
If M&A is implied in your question.
We shown that we tend to use equity for M&A because there is commodity prices are volatile it creates a more stable deal structure. So.
Our balance sheet will always be strong enough to enable us to not only manage commodity prices, but also make sure. We're positioned to do what we need to do they don't need to remind you that we were the first to do a transaction coming out of Covid, when we announced the acquisition of noble Energy and then we followed a year or so later and acquired renewable energy group. Thanks Sam.
Thank you.
We'll take our next question from John Royall with Jpmorgan.
Hi, good morning, Thanks for taking my question.
So can you talk about the general demand trends Youre seeing within your system are you starting to see any signs of.
Weakness under the van side and.
If the answer is no just curious on your views on what's happened to spot refining margins globally.
What seems like still a relatively tight market.
Yeah, So John a couple of thoughts I guess I'll just go by.
The product commodities I mean gasoline demand is essentially back to pre pandemic levels globally. Obviously, there are regional variations in this.
We're sitting in California here on this end of the call we've had a very wet winter and so the first quarter.
You know reflects.
Unusually.
Wet season on the West Coast.
In Asia, we see demand coming back right as the economies continue to.
To continue to open up and mobility is increase et cetera, but broadly speaking gasoline.
Flat diesel has had kind of carried the complex through COVID-19 and and global demand has been at pre pandemic levels for a while now.
First quarter demand in 'twenty three is a touch lower than it was in first quarter of 'twenty two.
Would be an indicator of the beginning of some economic slowdown.
But you know.
Certainly.
I think premature to conclude that but diesel is is maybe not leading the parade quite as strongly as it had been for the last the last couple of years of jet demand continues to grow.
And it's still below.
What kind of pre pandemic levels, China's the place obviously that everybody.
Has been paying attention to domestic.
Travel up to nearly 90% of pre COVID-19 flights in and out of the country is still well below that and we see flights being scheduled you see indicators that suggest travel will grow you listen to the airlines and that certainly seems to be what they anticipate but that's that's in progress. So that's a kind of a quick look across.
The product slate.
I think margins reflect a couple of things one a year ago.
No we weren't a period of recovering economies and all of that.
We're coming out of a prepared to rationalizing refining capacity around the world and you can go to any part of the world and find refineries that had shut down that perhaps you know people expected would close one day, but it happens relatively quickly and at the same time you saw a big growth projects that had been deferred because of the uncertainty.
Relative to Covid a year later here you don't see refiners closing at the same rate we've seen.
Refinery startups in the Middle East.
Seen projects here in the U S and in Asia, as well, so refining capacity coming into the system demand has moderate a little bit margins have come down there is still stronger than historic margins. If you look out over a longer period of time, but trending back down towards mid cycle.
Pretty strong in the U S. Maybe under a little more pressure in Asia, but you got to think about the feedstocks in Asia, where theyre coming from how they're priced and how those markets are working so.
I don't see any.
Big warning signs flashing, but certainly.
No we're paying close attention to it.
Very helpful. Mike. Thank you and then maybe sticking with the downstream and you mentioned, California can you just talk about the new regulations in California around.
Central for excess profit penalties not sure if that's exactly how to refer to it.
How much does that impact how you think about a refi.
Refining in California, and your positioning in California.
Maybe the expected impacts on the broader market there.
Yeah.
I'll talk about it sure.
So.
The bottom line is this is now into a rulemaking process Theres no impact right now.
And it's into a kind of a bureaucratic phase I think implementation is likely to take quite a while.
And.
It's hard to say exactly how it plays out.
You know the.
What started as a an effort to create a windfall profits tax was unsuccessful because you need two thirds of a vote in the legislature for new tax in California that then modified into some other forms that ended up moving into the energy Commission, where there'll be.
A group of established that will gather a lot of data and try to assess the profitability industry against some standard, which I think is yet to be.
Fully articulated so so this is going to take some time it could potentially result in.
And some sort of a fine or penalty for margins or profits above a level, but I can't tell you how it's going to play out because it's there's a lot of work to be done there.
The I guess the things that I would say are pretty predictable or maybe two one there are substantial new reporting requirements and so there's a lot of data we're going to have to produce we're happy to do that we'll work closely with the energy Commission to make sure we get them. The information that they are requesting and then the second is I don't think this does anything.
To encourage investments or new supply, which is really what's needed in a marketplace a commodity market to bring prices down on average over time in fact, I think it runs the risk of doing the opposite of discouraging investment.
Decreasing supply overtime, which if demand does not moderate will tend to exacerbate volatility and overtime probably result in an average higher levels of price. So that's about all I know about it at this point.
And we'll watch it as it unfolds.
Thank you.
Thanks, Mike Our next question from.
I'm sorry, we will take our next question from Doug Leggate with Bank of America.
Hey, Good morning, guys. This is clay on for Doug Thanks for taking the question.
The first one is on the new Permian disclosure. So you guys are forecasting flat royalty volumes. So I'm wondering as that becomes a smaller part of the production mix. How is the cash margin from that asset affected going forward.
Well the royalty barrels have essentially an infinite margin and so I think you and Doug and can do the math as it has a slightly lower percentage then that'll that'll be a part offset but theres lots of other drivers that we're doing to enhance margins and we've shown return on capital employed near 30% at $60.
Brent equivalent for our Permian, So it's a high return low carbon.
Asset and the royalty barrels as you know come with virtually no cost and that's part of the advantage that we have.
Understood I appreciate that year. My second question goes to <unk>, just wondering if we can get an update on timing for <unk>.
First oil from new expansion projects and the dividend the dividend magnitude for 2023.
Yeah. So the expansion project as I said, there's a lot of turnarounds in activity. Both this year and next year.
At our Investor Day, we laid out a bar chart that gave you an idea on.
Production the real I think the time as I said earlier, when youre going to see the production.
Growth will manifest itself in 2024, because the next two years, we got a lot of these turnarounds tie ins et cetera in place so.
Here you can guide on dividend no no change in our affiliate dividend guidance that we shared on the last call a $5 6 billion for the full year that includes tengiz in our other affiliates, we expect like classier a dividend in the second quarter that it'll be modest and then a larger dividend in the fourth quarter TCA continues to hold.
More cash on its balance sheet to manage through both completing uncertainty around the project and in and around transport alternatives, but that cash will come back over time, it's been performing very well, but we don't give specifics on that by ear, it's embedded in our overall affiliate dividend guidance.
I appreciate that they're sold some turnaround to work through but asking production hit a steady state what do you expect the dividend cadence to look like.
So as I said last year, there was in two quarters. This year and again, it'll be second quarter and fourth quarter and we'll just it's up to the Tcl board of directors to make dividend decisions going forward Hey, thanks for your questions.
Our next question comes from Josh Silverstein with UBS.
Okay.
Hey, Thanks, good morning, guys.
Curious about the pace of rig activity in the Permian you guys are adding one per quarter. This year all of that seem to be to support growth next year.
I'm just curious as you're looking forward into next year do you need to add four more rigs next year to keep kind of that 10% growth pace is it less because you're getting more efficient in the Delaware production I'm, just curious how you're thinking about the step up in activity going forward.
Yeah, we I mean, we've pulled rigs down dramatically in 2020, and we didn't want a surge back.
With everything all at once and so you know.
We entered this year with 10, we expect to exit this year with 14 coop rigs running.
And I think consistent with the longer term production profile that we've outlined.
We've got a big base business that does have declined underneath it and so you're you're going to expect us to add some additional rigs as we as we move into 'twenty four.
And then I know theres a lot of activity stepping up across the rest of the lower 48, Haynesville DJ they're a little bit more on the gassy side I'm curious if you guys are pulling back any activity because they're a little bit more gas problem in this price environment.
We were adding a rig in the Haynesville are we talked about that for a number of years building up to that activity.
Gas prices are going to be volatile and frankly, we need to get developing that resource that we have some offset operators and so if we don't get after it.
Time for us to do that the DJ still has a heavy liquids component no change in our plan in fact, the DJ in Argentina are a couple of other.
Areas, where we expect production in the second half of the year to be higher when we're increasing a little bit of activity and again all of that is within our existing capex budget.
Thanks, Josh.
Well go next to Ryan Todd with Piper Sandler.
Great. Thanks, maybe.
First off just a quick follow up on.
On the comments earlier on the question on trading and the international downstream earnings were particularly strong this quarter and I think in the slides there either the $270 million of other bar positive other bar on the chart there is that primarily trading.
And anything to read on.
And that going forward is that something that likely reverses or.
Maybe some clarity there.
You're right, we referred to it I would not say its primarily its a lot of factors and we pointed out to that it's consistent with how Mike described our trading business and as of all trading businesses or it can be it can be variable in future quarters. So it's just one of many factors.
Not primarily but we wanted to cited as one of the elements in that other variants.
You've also obviously you talked at the Analyst day, you talked about a variety of the shifts in the 2023 development plan versus 'twenty to 'twenty two.
I think and you highlighted some we're headed I think we appreciate some of the near term impact can you talk at all to what some of the longer term implications are.
The shift to more single bench development adjustments of spacing more shifts towards new Mexico et cetera.
Does it have any impact on like does the.
The move to increase single bench development have any impact on the productivity of recovery of other zones in the area does it change at all how you think about service infrastructure and logistics.
How are you thinking about resource steps in different parts of the portfolio.
Over the long term.
Yeah, Ryan I would I would say not really.
We've always been return seeking.
And so this is all about optimizing.
The return we can get out of this asset over the long haul.
Tried to be.
Thoughtful about surface infrastructure, we've tried to be thoughtful about drilling to keep surface infrastructure fully utilized not overbuilding. It for peaks and then leaving an underutilized for long periods of time and and as we're.
Continuing to learn.
The fundamental principles about optimizing return on investment.
<unk> continued to drive all of this activity so.
You know as we learn more about our ventures about communication about productivity as technology changes recovery factors. We will continue to apply all of those learnings, but the real objective remains the same it's not volume its value and returns.
Hey, Ryan and just as a reminder, the move to more single benches in the Delaware Basin Midland Basin, three quarters is multi bench development.
Alright, thanks, guys.
We will take our next question from Jason <unk> with TD Cowen.
Hey, good morning, Thanks for taking my questions.
Sorry to go back to the Permian, but I'm going to ask another I was wondering and I. Appreciate all the disclosures are really helpful. But in terms of the non op.
<unk> component of.
Production does the proportion stay relatively stable through your forecast period. I think you you gave a forecast out to 2027 at the analyst day.
Does the non op proportion.
It stays.
Relatively similar I would say Jason.
Can you provide further insights on that as we all know COVID-19 theres not a big shift.
<unk>.
We're growing we're growing activity as I mentioned earlier, we're adding rigs.
And you got a pretty big base, you're adding it on top of it so those percentages don't move a lot.
Alright, that's helpful. And then just one accounting question depreciation fell decently quarter over quarter and upstream what was that related to.
Are you looking at it excluding special items are.
Yeah, if I look at at the quarter over quarter Slide seven upstream DD&A was positive $3 45.
Yeah, I wanted to follow up a jake that that could be tied to some of exploration activity.
Okay. Thanks.
We'll take our next question from Brian <unk> with Royal Bank of Canada.
Hi, there. Thanks for taking my question I wanted to ask about maybe are you recently farmed in a few months ago could you just walk me through.
Plans for the next 12 months or so what he's got penciled in.
And then I've got a follow up on something else. Thank you.
Sure. So so we've completed seismic acquisition in Namibia at the end of February .
And that's being processed right now and so I can't really comment any further on that we certainly are mindful of.
Others, who have had certain exploration success in the region, which is encouraging.
But we need to do the work on that and and then determined.
What the next steps are which can include drilling exploration wells so stay.
Stay tuned on that as we've got more information, we'll share it with you brush.
Okay.
And then just on a different topic cost inflation, because more and more you hit some of the service providers talking about improving pricing and so on so could you just comment on <unk>.
Just thoughts on what you're seeing on the cost inflation side outside of the lower 48.
<unk>.
Sure So really no change to our mid single digit inflation guidance in our current year capital spending as you know in the lower 48, there are some areas where.
We planned for a higher higher inflation and are seeing that.
Remind you that a lot of what we do on our.
<unk>.
<unk> activities are longer term contracts that are either fixed price or index based.
We've got detailed cost models to challenge price increases, we commit volumes to certain things over longer periods of time to try to.
Create a win win between us and our suppliers and so we've not seen some of the cost push through that you would say if you are buying.
Services are commodities are inputs on a spot basis, our then current basis.
Because we manage that activity differently, you know for instance on offshore rigs.
They are generally below current market rates and so.
I think we're managing this well.
The one thing I would say.
Given these kind of index based contracts there are periodic reviews, where we will reset based on market indicators and so you know in.
In the second quarter in certain parts of our business will be going through this with some of our our partners and we will see some resets on their that'll probably reflect a little bit of the inflation that I referred to earlier, that's already built into our plans, but I think we're managing all that are within the range that is embedded in the guidance. We've given you.
Alright, Thank you very much.
Thank you brush.
Thank you we will take our last question from Neal Dingmann with Trust Securities.
Hi, This is Patrick in rate in Paas with Neal Dingmann.
Uh huh.
It's with respect to Venezuela and exports are no previously mentioned.
Real no further capital investments in Venezuela.
What were curious to know is is there a maximum threshold.
Export sales.
Youre anticipating out of Venezuela.
Is there a maximum I mean, it's it's limited by you know our position there and in the.
Entities that were involved in and what our portion of that production.
Production that we're entitled to market as well.
We're currently.
Seeing about 100000 barrels a day of production up from about 50, when the license terms changed that could go up further this year, maybe another 50% if everything goes well.
You know the crude comes to the U S and we're finding a market for the crude.
And.
Yeah, It's a six month to six month license from OPEC and we have to bear that in mind. So that's why we are proceeding as you said, which is we've got some past receivables that are being paid from some of these proceeds.
And there's a lot of.
Relatively straightforward workover and other activity that can help bring production up at without major capital commitments and so that's that's the current model, we'll see how things unfold and and hopefully pointed it out in a good direction, but it's been.
It's been a bit of an up and down situation and we have to we just have to take us one step at a time.
And stuff there I guess, just as a follow up would there be.
Or are you exploring that six month term are you looking to extend that at all or is it.
Too early to be negotiated.
That's a decision made by the U S government, but it's not really a negotiation.
It's their decision and it's a policy matter, whereas for input and so we provide input on these things but.
For the last several years. These things have had relatively short time lines associated with them and and so we were in full compliance with all the conditions of.
The sanctions and intend to stay that way and we'll just see how the how the policy making turns out.
And just getting I'm going to go back thanks, very much a M. P M and I go back to Jason's question. So yeah, lower depreciation it's really three drivers somebody that was the absence of some abandonment accruals that were in the fourth quarter. So you can view those as sort of nonrecurring and then some of it is due to new rates of each each year, we re.
Revised our depreciation rates based on <unk>.
Additions to proved reserves and those rates are a little bit lower and then of course first quarter production was little bit lower than fourth quarter production. So lower volumes also contributed to that lower depreciation.
I would like to thank everyone for your time today. We appreciate your interest in Chevron and your participation on today's call. Please stay safe and healthy Katie back to you.
Thank you. This concludes chevron's first quarter 2023 earnings Conference call you may now disconnect.
[music].
Yes.
[music].
Okay.
Thank you.
[music].
Great.
[music].