Q2 2019 Earnings Call
Thank you Jonathan.
And welcome to Chevron's second quarter earnings call and webcast on the call with me today are Jay Johnson VP of upstream and Pierre Forever CFO .
We'll refer to the slides that are available on chevron's website.
Before we get started please be reminded that this presentation contains estimates projections and other forward looking statements.
Please review the cautionary statement and important information for investors and stockholders on slide two.
Turning to slide three.
And Pierre.
Thanks Wayne.
We had another solid quarter.
The company delivered record production led by continued strength in the Permian Basin.
And at Wheatstone in Australia.
Jailed ride more details shortly.
First an overview of our financial results.
Earnings were $4.3 billion or 227 per share.
This is the highest reported quarterly result.
Since the third quarter 2014, when Brent was over $100 a barrel.
The quarter's results include especially lighting gains totaling 920 million from the Anadarko termination fee and the tax rate change in Alberta.
Foreign exchange gains for the quarter were $15 million.
Excluding special items, and FX gains earnings were $3.4 billion or $1.77 per share.
A reconciliation of non-GAAP measures can be found in the appendix to this presentation.
Cash flow from operations was almost $8 billion, excluding working capital changes.
We also maintained a strong balance sheet with a low debt ratio.
Importantly.
Our continued strong cash flow.
Allowed us to deliver on our commitment to return significant cash to our shareholders.
During the quarter, we paid over $2 billion in dividends.
And after terminating our agreement with Anadarko.
We resumed buybacks and repurchased $1 billion of shares during the quarter.
Going forward.
We expect share buybacks at the $5 billion annual run rate or 1.25 billion per quarter.
In line with our updated guidance stated in May.
We also continue to maintain capital discipline.
With a focus on increasing returns.
Year to date organic Capex was $9.6 billion.
A little less than half of our 20 billion dollar budget.
Total Capex, which includes acquisition cost that are unbudgeted, such as the purchase of the Pasadena refinery.
Total to $10 billion.
Turning to slide four.
Cash flow was strong.
And the trend is in line with full year guidance.
Cash flow from operations, excluding working capital increased this quarter due to growing production volumes and higher liquids realizations.
As well as the termination fee received from Anadarko.
Free cash flow, excluding working capital increased to $4.3 billion and supported the dividend debt reduction and share buybacks.
The company's cash flow breakeven remained in the low fiftys on a brand basis year to date.
Asset sales proceeds added to our positive cash flow.
And further lowered the breakeven while high grading our portfolio.
Since the beginning of 2018.
Asset sale proceeds have totaled $2.9 billion.
And we remain on track to divest $5 billion to $10 billion of assets by 2020.
Turning to slide five.
Second quarter 2019 earnings of $4.3 billion increased about $900 million versus the prior year.
Excluding special items and FX.
Upstream earnings were relatively flat as higher production was offset by lower realizations.
Downstream earnings also relatively flat.
As timing effects were offset by lower margins.
The variance in the other segment was primarily the result of lower corporate charges.
Turning to slide six.
Compared to the first quarter.
Second quarter earnings increased by about $1.7 billion.
Excluding special items and FX.
Upstream results were roughly flat.
As higher Liftings in crude realizations were offset by lower gas realizations higher DNA and other expenses.
Australia gas realizations were lower primarily due to lower LNG spot prices.
And a higher ratio of spot LNG sales.
While U.S. gas realizations reflected weaker Henry hub and Wahab pricing.
Downstream earnings excluding FX improved by about $520 million.
Due to stronger us west coast, refining and marketing margins and timing effects.
Partly offset by the impacts of planned downtime.
The variance in the other segment largely reflects lower corporate charges.
I'll now pass it to Jay.
Thanks Pierre.
On slide seven second quarter oil equivalent production increased 9% compared to a year ago were shale and tight production increase in the Delaware and Midland basins and production from major capital projects, increasing with ramp ups at Wheatstone key brawn and big foot.
Our base business production increased as Gulf of Mexico, and other deepwater brownfield development more than offset natural declines across the portfolio.
Turning to slide eight.
Second quarter production was strong at more than 3 million barrels a day for the third straight quarter.
Year to date production, excluding asset sales is about 5% higher than 2018, consistent with our guidance of 4% to 7% growth as shown by the middle bar.
Second quarter production was impacted by planned turnarounds and asset sales, which together had an impact of almost 70000 barrels a day.
Looking forward to the second half of the year, we expect production growth to be primarily driven by our shale and tight assets as well as the continued ramp up of big foot and he Braun.
This growth will be partially offset by higher turnaround activity in the third quarter.
Our full year outlook is expected to be in line with guidance, even before adjusting for the entitlement impacts of higher prices.
Let's turn to the Permian.
And the next three slides I'll provide some additional information regarding the attractive performance and the potential of this asset.
Permian shale and tight production continues to track the guidance, we provided at our 2019 security analyst meeting.
In the second quarter production was 421000 barrels of oil equivalent per day.
An increase of over 150000 barrels a day or about 55% relative to the same quarter last year.
The strong performance demonstrates our track record of consistent execution, and we expect to deliver 900000 barrels per day in 2023 with a relatively steady rig count.
Moving to the mix of crude oil Ngls and natural gas about three quarters of our Permian production is liquids and half our production is crude oil.
We expect these proportions to continue throughout the forecasted period.
As discussed in the past, we have an advantage royalty position across the Permian.
And it's comprised of two distinct components.
First we have a royalty benefit shown in the dotted blue wedge as our actual royalty rate is lower than the standard royalty rate.
The second component comes from the royalty barrels shown by the hashed Blue wedge, which are the barrels we receive from the acreage that weve leased to other producers.
Of course these barrels require no chevron capital.
In total these royalty contributions make up about 20% of our production throughout the five year period and contribute to delivering our expected production profile.
Turn to slide 10.
Our work to reduce unit costs and increase productivity continues we're optimizing our Permian factory and maintaining our focus on delivering industry leading returns.
This slide shows the progress we've made since 2016.
As shown on the left we continue to drive higher eurs by optimizing well spacing landing zones and completion.
The average lateral length of our wells continues to increase and is expected to approach 10000 feet next year as we execute our core up strategy for our development areas.
As illustrated in the upper right. These efforts translate into a sustained reduction in unit development and production costs.
The chart on the lower right shows that the royalty benefit alone leads to returns that are about 10 percentage points higher than a comparable wells subject to the standard royalty burden.
As we said before our strategy in the Permian is to be highly competitive in our execution.
Leverage our midstream capability.
And use our advantaged royalty position to make us the clear leader in financial returns.
Slide 11 shows that we're well on our way.
As stated in March we expect to be free cash flow positive next year.
And we expect to grow free cash flow each year thereafter.
Earnings are expected to strengthen exceeding $4 billion in 2023.
All of this assumes the same reference prices communicated at our 2019 security analyst meeting.
As the Permian production increases, we expect to see operational cash flow nearly twice the level of see any by 2023.
And a return on capital employed of about 30%.
All delivered by an optimized ratable factory with relatively low execution risk.
To more than double production, while being free cash flow positive every year starting next year.
And generate returns on capital in excess of 20% along the way.
Shows why this is an attractive investment opportunity for our company.
And its shareholders.
We're focused on value not volume and our true measure of success is building a sustainable business with strong free cash flow and growing returns.
Let's turn to slide 12.
In the Gulf of Mexico, we have a robust portfolio, that's performing well.
Generates good value and has attractive investment opportunities at each stage of development.
We have a strong Q of exploration prospects that we are actively evaluating and maturing.
Earlier this year, we participated in the black to exploration, well, which resulted in a discovery near Perdido and whale.
The well encountered more than 400 feet of net pay and is within tieback distance.
Well and Ballymore are progressing through the appraisal phase to further assess the size of the resource.
As mentioned in March we are targeting unit development costs of 16 to $20 a barrel for new development in the Gulf of Mexico.
Anchor continues to progress towards up I'd, which is expected by early next year.
The technology, we're developing to exploit these higher pressure reservoirs will allow us to target other resource opportunities in the Gulf of Mexico.
At Mad Dog, two drilling and fabrication is progressing as planned and the project is expected to deliver first oil in 2021.
And we expect bid foot and stampede to increase production as we bring on additional wells.
We're also pursuing highly economic brownfield developments at existing assets, such as Jack St Malo and Purdue.
With our leading technology experienced workforce and broad portfolio, we're continuing to add value in the Gulf of Mexico.
Turning to slide 13.
I had the opportunity to visit Kazakhstan again in June and we continue to make good progress with the future growth wellhead pressure management project at Tengiz.
The projects now, 65% complete and remains on track for first oil in 2022.
As we discussed at the March Analyst meeting. This is another critical year for the project as we're fully engaged with module fabrication transportation and installation.
And that's our first full year of mechanical electrical and instrumentation work at site.
Detailed engineering and procurement are almost complete.
Reducing the risk of further impact on fabrication and construction activities.
We're on schedule to close out work at three of the four fabrication yards this year.
The logistics system is working well and modules are being delivered Restacked and said on foundations.
As reported in the media on June 29th one of our contractors at the Threeg site experienced interpersonal conflict that resulted in the suspension of construction activity at the site for several days.
Production operations and other of GP sites were not affected by the incident.
And overall the event is expected to have a relatively minor impact on project progress.
With respect to construction were just under 40% complete.
Looking ahead, our focus continues to shift to productivity at site, where we're seeing good performance from our workforce and steady improvements in productivity.
With that I'll turn it back over to Pierre.
Thanks Jay.
Slide 14 highlights some recent commercial developments.
First through our joint venture Chevron Phillips Chemical company, we announced two new petrochemical investments.
One in the us Gulf Coast and one in cutter.
Each is in a joint venture with Qatar petroleum.
The long term fundamentals of chemicals are strong.
We believe these projects offer attractive returns underpinned by advantaged feedstock.
World class scale and leading technology.
Also in the quarter, we closed the sale of our interest in Denmark and executed an agreement to sell our UK central North Sea fields.
Which we expect to close later this year.
Additionally, we completed our acquisition of the Pasadena refinery.
Which will enable us to supply more of our retail market in the region and process more domestic light oil.
In the renewable space, we recently agreed to purchase wind power to supply our Permian operations.
This is a cost effective renewable energy alternative to our current electricity supply in the Permian.
Also chevron executed an agreement to be an equity partner in Cal biogas.
Joint venture to produce and market, Gary bio methane as a vehicle fuel and California.
The project will capture methane that otherwise would be vented to the atmosphere and process it into renewable natural gas.
Turning to slide 15.
Our performance this quarter.
Reinforces for key messages you've heard from us in the past.
First.
We have an advantage portfolio that is delivering today.
And its position to do so over the long term.
As Jay highlighted in the Permian Gulf of Mexico and attendees.
Second.
With continued positive free cash flow this year.
We have the strongest balance sheet in the industry.
A low cash breakeven and resilience if prices fall.
Third.
We are disciplined with capital spending.
On track with our budget and committed to increasing returns.
And fourth.
We had a total cash yield of about 6%.
With the resumption of our share buybacks.
Bottom line.
We are positioned to deliver superior financial performance to our shareholders consistently.
For many years to come.
Now looking ahead.
Yes.
Ladies and gentlemen, please remain on the line the conference call will resume momentarily. Once again. Please remain on the line the conference call will resume momentarily.
Slide 16 again.
Okay.
Okay.
Checking to see if I can hear our speakers Hello.
We're here thanks, Jonathan.
Thank you I would you like to take questions at this time.
I believe we were cut off prematurely, so actually will okay.
With slide 16.
Okay.
Alright, you may resume.
Okay. Thank you Jonathan had this is Pierre and we understand that we cut off at slide 16, so I'm going to resume there.
And we're going to look ahead and upstream.
We continue to expect 2019 production growth to be 4% to 7%, excluding 2019 asset sales.
Planned turnarounds in Kazakhstan, Nigeria, and the northwest shelf in Australia.
As well as the early June July hurricane in the Gulf of Mexico.
Our expected to impact production in the third quarter.
Our full year guidance for Tcl co lending is unchanged at $2 billion.
Dependent upon price investment profile and its dividends.
In downstream, we expect high level of refinery turnaround activity in the third quarter.
Which guides to an estimated after tax earnings impact of more than $200 million.
For the third quarter, we expect a repeat purchase.
We expect to repurchase shares at a rate of $1.2 billion per quarter.
With that I'll hand, the call back over to Wayne.
Thanks Pierre.
That concludes our prepared remarks, we're now ready to take your questions.
Keep in mind that we do have a full queue. So please limit yourself to one question and one follow up we'll do our best to get all of your questions answered Jonathan Please open the lines.
Thank you ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key if you are listening on a speaker phone. We ask that you. Please lift your handset before asking your question to provide optimum sound quality again, if you have a question. Please press Star then one on your Touchtone telephone.
Our first question comes from the line of Phil Gresh from Jpmorgan. Your question. Please.
Yes, Hi, good morning can you hear me all right.
Good morning, Bill Yes.
So I guess first question just looking at this the Permian additional disclosure on your cash flow expectations.
It seems like what youre, implying here is that you can.
Grow earnings and cash flow.
And the ratio of cash flow to Capex keeps going up so it seems to imply a pretty flattish.
Capex profile, which I think is fairly consistent.
With the rig count trajectory you talked about the analyst day. So I was wondering if maybe you could just kind of walk through that detail and then secondarily with related related to that I know you recently had an announcement.
That you made with enterprise talking about takeaway.
Out of the Permian I was just wondering how that all feeds into this ability to ensure you get the best realizations for your production. Thanks.
Okay I'll take it pure may want to add in some at the end from a capex standpoint. So we are looking to maintain a relatively flat profile and capital and Thats because essentially we're looking to have a very steady rig fleet. As we go forward. We have 20 Com company operated rigs.
Those are basically on a 100% basis, because we operate our own.
Licenses.
And then we look for about 30, roughly gross non operated rigs, which equates to about seven to 10 net.
Non operated rigs so as we move that forward, we expect to see capital relatively constant we are building out infrastructure of course, and we always have some exploration activity out in front of US and we also do pilot work to ensure that we're continuing to drive to increase the recovery and efficiency of our development.
In terms of the takeaway capacity.
I'll break it into three different streams.
Ill start with the crude oil and basically for 2019 were well covered on our takeaway capacity for crude oil.
In 2020.
We are also covered for the year there may be periods of tightness in length as we move through the year, but we recently executed an agreement with enterprise not only for takeaway capacity out of the Permian basin, but also for export capacity that will lengthen our ability to.
Supply crude not only in the domestic U.S., but internationally.
When we look at natural gas liquids, we have full takeaway capacity for this year and next year.
And as we turn to gas, we really think of gas in two ways. The first is just basic flow assurance, we need to be able to move the gas without having to flare or have any threat of mitigating production.
In our avoidance of flaring.
So we have 100% flow assurance set up for the balance of this year and next year.
Terms, a takeaway of gas from the basin outward.
For export what we look at is this year were at about 20% of our gas can be exported from the basin.
And by the end of this year, we expect to be about 25% by the end of next year, we should be more like 60% of our gas being exported from the basin gives us more exposure to.
Other price structures, rather than just the waha.
Thanks, Great Thats helpful. Just my follow up question, Dan for Pierre just be some of your balance sheet commentary your net debt to cap I believe is the lowest since it's been since mid 2015.
Yes, I know you increased the buyback a bit there is a situation where you had.
M&A consideration there that that you walked away from but I guess, how do you think about.
That level of financial leverage and and where you want to keep the balance sheet for opportunities that might present themselves. Thanks.
Yeah. Thanks, Phil look our cash generation has been strong and we've.
Been returning cash to shareholders, we increased our dividend.
6% early this year as you mentioned, we've raised our guidance on the share buyback rate in may to $5 billion per year.
We're being very disciplined with capital managing to our 20 billion.
Organic budget in 2019 so.
The way the math works no doubt in the short term our strong balance sheet.
Gets even stronger that's okay.
Overtime. This strong cash generation will be returned to shareholders in the form of higher dividends and a sustained share buyback program. That's the way I would think about it I won't comment on M&A, we obviously have.
We're in a very financially strong position.
Same time, we've got a great value proposition for our shareholders that we've communicated at our March analyst Day, and then Jay provided more insight into some key elements today and that's what we're focused on delivering.
Thanks, Phil Thank you.
Thank you. Our next question comes from the line of Neil Mehta from Goldman Sachs. Your question. Please.
Good morning team I guess, the first question I have Jay I, just came back from Kazakhstan. The sounds like there was there were some questions around labor productivity as it relates to 10 Gies can you just confirm everything is on track and then just in terms of the capital budget as well.
Your confidence level in that.
And achieving the targets that you set out.
Yes. So we just did come back where they are in June and we talked about this at the security analyst meeting and in previous calls.
A big focus at site now is on labor productivity, we've got a lot of work to do as the modules come in are set on foundations last year. We are primarily focused on civils and underground this year, we're making the transition to mechanical electrical and instrumentation.
As we look forward, we have to get through commissioning and then all the startup activities.
So we've put in place specific tools that can really help us not only drive the productivity, but understand what what the drivers are where we have gaps from where our expectations are and what we need to do to to close those those tools are now widespread across the site and are proving to be very effective. So we've seen steadily improving productivity across the workforce and we're actually feeling pretty good about where the executions headed at this point, but it's early days, we're 40% roughly complete on construction and we've got a lot of man hours to go over the next couple of years in terms of the overall capital program you've seen we continue to be right in the middle right on our guidance, we're about 50% expanded on our chevron see any through mid year, and we still expect to maintain our guidance of 18 to 20 billion for next year. So that should give you a pretty good idea where things that.
Okay. I appreciate this and this follow up question this might be for you Pierre you've gotten a lot of credit for investors for for stepping away from the Anadarko potential transaction and showing the capital discipline.
Since the deal closed the stock has materially outperformed.
Other constituents they actually your exo P. The others independent.
NPS and that multiple arbitrage or or share price ratio arbitrage seems to be opening up again.
Just want to get your thoughts on M&A again, it felt opportunistic but is it is another opportunity potentially opening up here.
Yes, no. Thanks, Neal look I, obviously cant speculate on M&A, what I can restate is we have a very strong value proposition for our shareholders and if I can just some of the key elements that we communicated in March is 3% to 4% production growth guidance through 2023, very disciplined capital program. Jay provided the 2020 guidance of 18 to 20 and longer term guidance.
$19 billion to $22 billion from 2021 to 2023, we have leading upstream cash flow margins, leading earnings margins and we're improving cash returns on capital employed by more than 3%. So we clearly do not need to do a deal that said as you said we have been opportunistic in the past if we see a good strategic fit.
At at a good price at a good value and two recent examples would be the Pasadena refinery and Anadarko, but we've moved on and we're focused on delivering a growing earnings and cash flows for our shareholders.
Thanks, Pierre Thanks, Neil.
Thank you. Our next question comes from the line of Alastair Syme from Citi. Your question. Please.
Hi, Good afternoon, I just had a couple of questions. One can you talk a little bit about anchor.
Sure hoping to everybody next year, what would you think has to happen.
To move to move that forward because my understanding is there's still some quite significant technological challenges.
And the follow up.
Just talk a little bit it just sort of question just on the asset sales, but you you announced the UK asset sales.
All in the quarter can you talk around what happens on the decommissioning liabilities associated with those assets. Please.
Yes, so with anchor.
We are in the feed process. So this is doing all the preliminary engineering work prior to the detailed engineering I would say there are two primary technologies to be developed to support anchor and in developing for anchor will also have these available for.
Other opportunities that we foresee the first is just the high pressure technology to getting to the 20000 PEO side.
That's well along and we really it really comes down to just thicker steel we're in the qualification stages and we really don't see that as a major technology shift. It's just a matter of working through the process and the second is the higher hook loads for deeper wells and this will also support potential developments like valley more.
So neither of those do we regard as a particularly challenging technological advance, but an important one to get finished so we do expect to be on path with anchor for F. I'd.
Early in the next year.
In terms of the.
North Sea deal, we really don't get into the details of any of our commercial transactions.
I can't really comment too much on that other than to say as an overall package, we're very comfortable with the.
Transaction as it's been constructed and are working with the buyer to move forward to close yes, and I think I can add to jay's comments that were fully in tune with the importance of abandonment obligations and thats carefully considered in terms of the financial strength of the partners that are the parties that we transact with and again we won't.
Be specific as its commercially sensitive, but it's as you can imagine a point of negotiated in the negotiation and something that we don't intend to to be exposed to overtime.
Okay. Thanks very much.
Thanks Alastair.
Thank you. Our next question comes from the line of Rob Borkhataria from RBC capital markets. Your question. Please.
Hi, Thanks for taking my question and apologies if I missed this was cut off the call but.
I have a question on on LNG, you mentioned, a higher ratio spot LNG sales in the quarter could you just.
Through what was driving that one of your peers have talked about.
Bias will that contracts not taking that full nominations I was wondering if that was the issue or is there something else that thank you.
Yes, Thanks for US I'll talk first in general because there's an element of.
As we gain.
In our performance the facilities are performing very well reliabilities coming up we have extra production over and above what we had planned and so all that production is going to be exposed to spot prices.
And so thats going to be an ongoing thing.
In the second quarter, specifically, we certainly had excellent performance at both Gorgon and Wheatstone and so we had extra production coming from that.
But at the same time, we also deferred a turnaround so we had a turnaround scheduled in the second quarter. It's been moved to the fourth so we had extra cargoes there that were exposed to spot.
We do have some downward flux that was exercised by some of our purchasers in the shoulder months and that occurred in the second quarter.
And then finally there is also an element even in our fixed term contracts, where we had about a three to six month delay in the oil pricing that they are linked to.
So we saw some downward movement in that that element. So together those all really drive the realizations in the second quarter for LNG.
But as I say going forward, we do expect to see increased production as our reliability has been higher and our overall goal would be to turn that up and get closer to what our expected production is as we gain continued confidence in the reliability of the facilities.
That's great color just a quick follow up.
Google in particular, I think in the past you mental about.
People are liking the project.
Increased capacity by maybe 10 or 15% could you just update us on.
Well, we are now relative to the original nameplate.
Yes, I don't recall as giving out specific guidance on percentages have increased our focus right. Now is on doing a couple of things. That's first is just getting the reliability increasingly high and we've seen very good reliability. We're still learning these facilities as they continue to operate and we build learnings from some of the shutdowns and turnarounds that we've already accomplished into future wins.
As we look forward.
What we are looking at is we're collecting the data literally daily as we move through an annual cycle of the ambient conditions as well as the performance of the plant, we look for where the restrictions that keep us from going to that next level of production.
At this point in time, I'd say, we're probably 2% above where we expected to be on Gorgon production around 6% above on wheatstone, but it's an ongoing effort as we move forward to get more out of our existing investments and infrastructure.
Thanks very much.
Thank you. Our next question comes from the line of Jon Rigby from yes to your question. Please.
Oh. Thank you, yes I'm two please the first is.
We do have a docket transaction during that process.
I felt that you sort of indicated that you had capacity and willingness to.
Deepen your deepwater participation globally, and you spoke quite enthusiastically about adding.
Extra LNG to your portfolio.
Creating a global.
Position et cetera. So.
As you move forward with new opportunities as and when they arise is systematically outside of the US is that where we should expect you to be appearing all looking and then the second just very specifically.
With the new refinery.
I said what are the plans for that.
Now you've got ownership of it thanks.
Yeah. Thanks, John This is Pierre and I'll start.
I said earlier, we moved on but it looks like it will go back to Anadarko a little bit here.
There were several elements of it the transaction there was the fit in the Permian there was the fit in the Gulf of Mexico, and there was the LNG and there was the ability to.
Get synergies out of the transaction and do it at an attractive price that was we thought was good for their shareholders and good for our shareholders. So that if you want to get into our thinking we were.
Adding LNG is something that absolutely we are interested in doing weve got a great position in Australia that Jay just talked about that's generating a lot of cash where we have.
Opportunities to de bottleneck.
And potentially add to that over time and you'd expect that we are.
We're always working the portfolio in LNG is one of the asset classes that we're interested in and we'll pursue opportunities in that space that makes sense for the company and our shareholders.
In terms of Pasadena, we've had three very clear strategic objectives.
On it.
Oh, one was to provide some equity product into our retail network in Texas. The second was to coordinate and optimize feedstocks in other flows between.
Texas, and our refinery Pascagoula, Mississippi and the third was the demand was to process more domestic light oil and an increasingly.
Try to.
Position and retool the refinery a little bit to take more and more Permian oil.
So really I mean, there it's very early days, but I'd say everything is on track and aligned with the strategic rationale. So theres been no surprises in terms of those three objectives, we feel we can meet them.
With the with the acquisition we've had some early wins in fact over the next few months, we expect to run up to 30000 barrels a day of Permian.
Crude oil has a little more than we actually had thought at this point in time.
Also we know there is work to do as expected on maintenance and reliability of of of the facility. So everything is on track and we feel good about it but its early days.
Thanks, John .
Thank you. Our next question comes from the line of Jason Gammel from Jefferies. Your question. Please.
Thanks, very much on the guys.
I have a couple on the Permian Slide number 10, I guess the first one would be obviously, some fairly impressive absolute performance and.
Increasing you are and decreasing development production costs on an absolute basis I know you do a lot of benchmarking how would you say you stack up against industry in those areas now.
Yeah. It's a good question, Jason I think the we do do a lot of benchmarking and this is continues to be an evolving story. So I would say we're competitive on these areas. We have a very good understanding, particularly in terms of the type curves across the entire basin, we have the capability and actually run.
Decline curves across not only our own but competitors' wells. So that we understand how our wells are performing and we're actually very comfortable with the.
Overall performance not only in terms of the recoveries, but the economics that we're generating from the execution work and then when thats coupled up with our ability to.
Use our midstream capability and our.
Our royalty position, it's really giving us I would say leading financial performance overall. So if you went back and looked at our security analyst meeting slides. We showed you some of the competitor data. We also showed you how our actual type curves are performing relative to our expectations and they are very tightly coupled.
So I think we have a good understanding but we're seeing that continued improvement as we move forward.
Yeah, the only thing I would add to Jay's comments. This is Pierre is look I mean, there are that you can cherry pick a lot of data out there to physician how you look.
We've been pretty consistent and what we've shown and also.
We've done a lot not just Jim.
General benchmarking by comparisons to our non op partners are the operators on our behalf, where we know we have very good apples to apples data. So it is an area of focus and we feel to compete very well.
That's great and maybe just as a follow up just as yeah. Just a quick follow up I know some of the average lateral length. That's planned for 2020 is starting to approach 10000 feet in the past you've had.
Fairly frequently slides about swapping another positioning to kind of block up your acreage and if you're moving towards 10000 feet. I'm suspecting you are getting getting a long ways towards doing that but can you just kind of talk about whether there's further opportunity there.
Well as we can in the existing development areas, we are getting higher and higher on our average lateral lengths and approaching that 10000 foot mark.
In the.
Areas that Weve transacted, we had about 60000 acres that we transacted in 2017 and 95000 acres in 2018.
Those enabled all about 1900 longer laterals. So it's really helped us in our core up development areas. As we continue though to open up new development areas. We're going to continue to have this land activity as we optimize our land position so about half of our acreage overall, we consider to be in very highly productive areas.
And what we want to do is continue to use swap outs or swaps and farm outs.
Sales acquisitions to continue to core up our development areas, we try and do that in a timely manner. We don't want to get too far ahead of ourselves, but we do want to make sure that we're drilling efficiently as we start each area.
As we've said many times our focus is on delivering returns not just chasing production are chasing a certain activity level.
Thanks, guys.
Thank you. Our next question comes from the line of Doug Leggate from Bank of America Merrill Lynch. Your question. Please.
Thanks, Good morning, everyone.
I was wondering is thought Gee I could take advantage of you being.
Being on the call just a little bit in terms of.
The assumptions you made in the Permian on the cash margins things have obviously deteriorated it no fault of your own in terms of Ngls and gas so.
If how do you see the prognosis. They are what assumptions are you, making when you were talking about capex versus cash flow.
And I guess the can the last piece of that question is.
900000 barrels a day at a 3.33 0.4 in 2000 to 2023.
Suggests that your cash margin across the portfolio.
Good move away from the sort of sector, leading level you bought in the past I'm. Just curious if you can offer any thoughts on that I've got a follow up please.
Well the cash the assumptions that we provided are all given in our security analyst meeting deck. So you can go back and reference those and what we're trying to do is continuing to make sure. We have the flow assurance as I mentioned earlier in the call to move gas out to other markets and not have it captured in the immediate basin.
Crude oil were already well ahead of that we move our crude.
Outside the basin, and we can access and optimize the markets that we're reaching.
In terms of the cash margin overall again, we've given you that information, we see that as very strong theres always going to be fluctuations in the market as there is tightness in length in different locations, but overall, we feel pretty strong about where we're heading with this as a production base, but also the other production we have around the world.
Okay I understand so there's a lot of moving parts and not.
My follow up is some kind of related and this is.
Historically when oil prices were a lot weaker.
You guys talked routinely about what your sustaining capital was in the portfolio and obviously there has been reset favorably by very large LNG projects and I was kind of dominate the base the base decline the likely at all.
As you move towards again this level of helping a significantly larger.
Proportion your production and a high decline underlying unconventional asset base.
What is that due to the sustaining capital versus I think you used to talk about our like a $13 billion number how does that evolve as we.
Towards the five year plan.
Yes. This is Pierre and I'll start and ask Jay to add some comments, we've never really talked about.
Sustaining capital, we've given we have a $20 billion capital budget. This year that we talked about $18 billion to $20 billion guidance next year.
And then to 19 to 22 2021 to 2023 so.
The guidance is pretty clear, it's pretty tight that results in enterprise that is growing 3% to 4%.
Production growth through 2023 with with leading cash margins. So.
You know the.
Prior you times, we've talked about the base decline.
We are investing in the.
Unconventionals you saw in the Permian that it's the production is more than doubling while it's being free cash flow every year. Starting next year at returns that are going from 20% to 30%. So we feel really good about our position we're not focused on on keeping a base flat capital. We're focused on increasing returns, it's resulting in an outcome of higher production, that's translating the higher earnings and cash flow, but that the high decline that you referred to is.
That's the nature of the of the of the business, but when you're investing in it you can see that we are more than offsetting that decline and we're doing it in a very economic manner and as we continue to fill out facilities and keep facilities filled over time the reinvestment.
It is a very attractive use of capital for the shareholders.
Mike just build on what peers, because he's absolutely right as we have a larger percentage of our overall production.
Constrained by facilities that means we have the ability to to be very stable in our production.
And the same in some respects actually applies in the Permian, while any individual well may have a relatively high decline rate. It does approach an asymptotic curve, but the facilities, we install for each of the development areas. Our goal is to keep those full and one of the advantages of the Permian is a in the initial drilling we fill the facilities up but then we can go back through infill drilling programs and by going after the subsequent benches in a given development area and just continue to keep those facilities full.
And the amount of rig activity. It takes as much less for those subsequent drilling campaigns to maintain that production in a given development areas. So I actually feel pretty good about where the whole portfolio has moved and really I'm not too worried about.
What some people will see as a problem with these individual Permian wells.
So it's a great answer guys. Thanks for taking my questions.
Thanks, Doug.
Thank you. Our next question comes from the line of Roger read from Wells Fargo. Your question. Please.
Yes. Thank you good morning.
Good morning, Roger.
Maybe just to dive in here kind of following up on some of the Permian questions, What's your royalty position than others.
Developed since and with some of the problems were seeing from some of those the NPS.
Any risk to your outlook from.
Those who might have overstepped their balance in terms of the way they were developing the Permian.
Well Roger this is Pierre I mean.
You are right I mean, we don't control the royalty barrels because that's being operated by others, who own the working interest where where land owner and as Jay said, we receive those barrels with no capital no operating cost, but the flip side is if we don't control the development. So we're doing it based on an outlook and an expectation. It's certainly we know with the actuals have been but you're right that there is there is some risk of that I can go either way. It could go it could go bigger or lower than what we're showing dependent on what those operators activity levels are.
Okay, Great and then from a guidance standpoint on the downstream the high refinery turnaround activity for the third quarter.
I was under the impression you'd had fairly high turnaround activity earlier in the first half of this year. So I was just curious.
Was that the right interpretation.
And maybe if there is any geographic specific exposure on the.
Hi, Ta ours.
At this quarter.
Yeah. Roger So we have now adopted a practice of giving a pretty clear guidance on planned turnaround activity in the downstream and we characterize it as either a low medium or high so you're right second quarter was high and Thats.
Related to $200 million of after tax.
Earnings impacts both from higher cost and from.
Loss profit opportunity on volumes not produced first quarter was actually low which is up to $100 million of effects.
So in the third quarter with another another high high quarter, that's not unusual it just depends on how the plan turnarounds are set up we wont provide specifics on the locations.
Its commercially sensitive.
And so it's just something that.
We won't do ahead of time, we're happy to talk about it looking back so in the second quarter, we had.
Some planned turnaround activity in Pascagoula.
And in Asia.
So we can explain afterwards, but we think we're bidding or giving pretty clear guidance. So you're right that you should view the earnings after tax earnings impact of planned turnarounds in Threeq you to be the same or similar to twoq.
All right I'll leave it there thanks.
Thanks Roger.
Thank you. Our next question comes from the line of Paul Chang from Howard Weil. Your question. Please.
Hi, good morning.
Hi, Jason here and I think you mentioned in your prepared remark about the incident in 10 key with your contractor and leasing meet it seems like they may get these neoprene most serious talking about a between that follow on contract in that local people and may even be different Jen.
Can you give us a new been more update on that and what that that doesn't need initiate you've had been taken.
John do we solve the problem Dan.
Yeah, Paul I can give you a little bit more.
We this really centered around one particular contractor that was that the three GP site.
And there was obviously some disagreements between some of their workers and the management of that company.
When the issue happened.
We shut down the entire site.
The three G.P. site not the other sites that didnt have any impact on production operations, but we wanted to make sure that that the problem was mitigated in contained and we understood what was at the root of it we've worked with our contractor they are putting in place corrective actions.
To make sure that they deal with some of the concerns that were there.
That is the only contractor that's had an extended ramp up so they are working back to their normal strength and we expect to see them that normal strength by the end of August . So at this point in time, we don't see it as having a material impact on the overall progress of the work that contract was about a month ahead of where we expected them to be on their work flow. So unfortunately have used up some of that float that they built up but we believe we're going to be able to mitigate the impact of this.
The worker.
And the workforce relations are always important to us and this is one that we continue to stay focused on it's very important as now our focus continues to shift to site and I can assure you we'll stay focused with our workforce to make sure that we're trying to anticipate and deal with any other concerns.
And the second question, Jay I think in Angola.
14, yes.
I think that the exploration you said 2023 and in Nigeria that.
Amit I think is 2021, when you guys will start the process.
For the renegotiation on those.
Well, that's not something we normally are going to talk much about publicly Paul that's between us and our partners and the government. So I can tell you that those discussions and planning for that as well in hand, but I really won't be able to go into much detail on those at this time.
Okay I understand thank you.
Thanks, Paul.
Thank you. Our next question comes from the line of Sam of going from Wolfe Research. Your question. Please.
Good morning, Hi.
So one of the in the Permian one of the things that you talked about contributing to your rig count staying relatively flat is that you're building up a nice stack of.
Vintage wells and you've got some legacy production, that's supporting the outperformance of the new wells just really quickly Jake can you shed some light on the on the performance of those older wells It sounds like your leading edge wells are.
Meeting your expectations, but how are the vintage wells doing as far as.
The power, they're holding up and as they get a little longer in the tooth.
Actually they are doing quite well.
Our focus from day, one has been to maximize the returns that we can get from our investments in the Permian. So there's been a lot of questions why don't we increase our rig fleet went on we'd be more aggressive but the reality is we continue to learn as everyone. In the industry is as we move forward and I think a lot of the moves we've made to stay focused on returns now are paying off.
Many people talk about how high their initial production rates are in their first six month rates, but what we're really looking at that can actually damage wells and cause aggravated decline curves. So we're looking at the total expected recovery. We're looking at the economics of a well over its life, we're very careful in our drawdown rates in those early months to make sure that we don't.
Cause damage in a wellbore in the formation.
When we put all that together, we're seeing our base production that is the production that's already online continuing to perform such that when we drill these new wells, we can add that on top and as you saw from the chart I believe it was on probably page nine.
We've been able to continue to deliver ride on our production profile and we feel very well very good about how our wells are performing.
Thank you so much and then this one should be relatively quick just in reference to the.
The strategic partnership between.
CP Chem and in Qatar.
Qatar has got a portfolio of other things that Chevron is probably a good candidate to participate in do you.
Do you see that relationship deepening as you kind of advance on the on the chemical side throughout the Chevron organization or you keep it that silos into into camps.
No no. We look we have a good relationship with.
Kind of a trailing for sure and so to CP Chem and when the retirees look at sea began they look at it as three companies ride Chairman Phillips, Phillips 66, and ourselves and so.
Where we have a good relationship with them I will say that trend the deals stand on their own I mean the.
Project in Qatar was was bid out us Gulf Coast again, there's.
Hello.
Other other alternatives that are considered so each transaction stands on its own but we're very proud that we have this platform with them and whether that leads to other opportunities or not I won't speculate, but we certainly have a good base to work off of.
Thanks, so much.
Our next question comes online.
From Raymond James Your question. Please.
Thanks for taking the question you alluded to.
The gas takeaway issues in the Permian and that Youre trying to avoid flaring has as much as possible but of course, you are realized gas price. What is now 60 cents in Q2, So I am curious if hey, he might get to a point, where you have no practical choice, but to either flare gas or shut in wells and if that happens which would you choose.
We don't Flair, we are not flaring and we haven't flared our policy is that we find flow assurance as I said is our first priority. So that we can move to the gas and we've been doing that and we've got that flow assurance covered so I don't see us being forced into the choices that you just presented.
I do as I said earlier, we're going to be increasing the amount of export capacity out of the basin to try and achieve better realizations and that's part of our overall strategy to maximize the returns that we can get from our investments in the Permian.
Okay and then.
Based on what I, just asked but taking a much broader perspective, youre talking about reducing carbon emissions just about every other us oil and gas producer is talking about the same.
When we listen to what's being said on stage at the debate says Im sure. You saw this week that point seems to be lost on the policy community.
And Im curious what what you think the industry has not communicated that is or what the dynamic is that has led to this disconnect between what you are saying and what the policymakers seem to be believing.
Well I'll say on that.
It's a big last question on the call here look I mean, it depends which policymakers right. We're in the midst of a.
Energy Revolution Renaissance here in the United States.
For sure a wind and solar is a big part of that but.
What's going on in the Permian Basin, what's happened in the Marcellus and Utica and growing natural gas production growing crude oil production exports to world markets and all the geopolitical.
Implications and benefits of that you can see our present talks a lot about that at the same time.
We share the concerns on climate change we referred.
On the earnings call to a couple of.
Investments that lower the carbon intensity of operations. It was when PPA in the Permian. So we are a consumer of electricity or using little renewable electricity there lower the carbon.
Intensity of our operations and the renewable natural gas, which is in California, which takes methane that otherwise would be vented to the atmosphere processes that puts it in the grid gets we have off take agreements with trucking companies. It generates low carbon fuel standards under the California regulatory regime, it's modest capital it earns an attractive return. So it's something that we believe is good for the environment and good for our shareholders. So we'll look to do more of that will be very balanced, but it's a it's a big question and we will be part of the conversation.
Thanks Bill.
All right appreciate it.
I'd like to thank everyone for your time today, we do appreciate your interest in Chevron and everyone's participation on today's call Jonathan back to you.
Ladies and gentlemen, this concludes chevron's second quarter 2019 earnings Conference call you may now disconnect.