Chevron Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
October 28, 2021

There are 15 speakers on the call.

Operator

Good morning. My name is Katie, and I will be your conference facilitator today. Welcome to Chevron's Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' remarks, there will be a question and answer session and instructions will be given at that time.

Operator

As a reminder, this conference call is being recorded. I will now turn the conference over to the General Manager of Investor Relations of Chevron Corporation, Mr. Roderick Green. Please go ahead.

Speaker 1

Thank you, Katie. Welcome to Chevron's Q3 earnings conference call. I'm Roderick Green, GM of Investor Relations. And on the call with me today are Mark Nelson, EVP of Downstream and Chemicals and Pierre Breber, CFO. We will refer to the slides and prepared remarks that are available on Chevron's website.

Speaker 1

Before we get started, please be reminded that this presentation contains estimates, projections and other forward looking statements. Please review the cautionary statement on Slide 2. Now, I'll turn it over to Pierre.

Speaker 2

Thanks, Roderick. We reported 3rd quarter earnings of $6,100,000,000 or $3.19 per share, highest reported earnings in more than 8 years. Adjusted earnings were $5,700,000,000 or $2.96 per share. The quarter's results included 2 special items, Asset sale gains of $200,000,000 and pension settlement costs of $81,000,000 A reconciliation of non GAAP measures can be found in the appendix to this presentation. Adjusted ROCE was greater than 13% and we lowered our net debt ratio to below 19%.

Speaker 2

Strong operating cash flow enabled us to deliver on our financial priorities, including the resumption of share repurchases. Compared to before COVID, operating costs are down, upstream production is up and we're much more capital efficient. Cost efficiency and capital efficiency are essential to navigate commodity price cycles, providing resilience through the low periods and leveraging upside when markets are strong. This has been evident over the past several quarters And especially so in the most recent one as we generated company record free cash flow, higher than the strongest quarters in 2008 2011 When oil prices were well over $100 a barrel. Adjusted earnings adjusted third quarter earnings were up more than $5,000,000,000 versus last year, primarily on higher prices, margins and volumes.

Speaker 2

Compared with last quarter, adjusted third quarter earnings were up almost $2,500,000,000 Adjusted upstream earnings increased on higher realizations and positive timing effects primarily related to managing LNG portfolio pricing exposure. Adjusted Downstream earnings increased primarily on higher refining and marketing margins. The all other variance was positive due to lower corporate charges and the use of deferred tax assets, which previously had a valuation allowance. 3rd quarter oil equipment production increased 7% year over year due to the Noble acquisition and lower curtailments, partly offset by price related entitlement effects and asset sales. I'll now pass it over to Mark.

Speaker 3

Thanks, Pierre. In Downstream and Chemicals, we delivered our best adjusted earnings in more than 4 years. Demand for our product is strong, with recovery of jet fuel sales And while the improving market environment helps, we're focused on what we can control: Safe and reliable operations, capital and cost efficiency and value chain optimization to drive higher returns. Some examples of our self help actions include using digital tools to improve planning, scheduling and prioritization of maintenance activity, Leveraging data analytics and asset flexibility to increase margins and adopting new technologies like robotic inspections and maintenance procedures. During our Investor Day in March, I highlighted that self help is expected to drive higher returns for downstream and chemicals.

Speaker 3

We're on track to meet that guidance with benefits already flowing to the bottom line. Chemicals performance is also strong As CPChem responds to current market conditions while continuing to keep a focus on longer term unit cost reduction. GS Caltex reached 100 percent design capacity of its mixed feed cracker ahead of schedule and under budget. The CPChem U. S.

Speaker 3

Gulf Coast II project continues to advance towards a final investment decision In a disciplined way that positions the project to earn attractive returns through the cycle. And the Wassa Lafond project is in feed And we continue to evaluate this project. We believe in the long term fundamentals of chemicals. Our investment focus continues to be on the low end of the Since our energy transition spotlight, we closed the acquisition of an equity interest in American Natural Gas and its network Of 60 CNG retail sites with our partner Mercuria, enabling us to meet customers' needs beyond California. We're also delivering 1st gas through our BrightMark partnership and all Cal Biogas farms are now online.

Speaker 3

We sold the 1st sustainable aviation fuel produced from our El Segundo refinery to Delta Airlines at LAX. And earlier this month, we announced an agreement to acquire Neste's Group 3 base oil business and its Nextbase brand. Pending regulatory approval, we anticipate closing in the Q1 of 2022. The acquisition is expected to provide a capital efficient approach to And coupled with Novi's renewable products position Chevron to be the supplier of choice to meet customers' needs now and into the future. Back to you, Pierre.

Speaker 2

Thanks, Mark. We recently released an updated climate change resilience report, which includes A stress test portfolio under IEA's net 0 2,050 scenario. A new target called portfolio carbon intensity that includes Scope 12 and Scope 3 emissions from the use of our products and Chevron's net 0 2,050 aspiration for upstream Scope 1 and 2 emissions. I encourage everyone to read our latest report available on our website. Now looking ahead, in the Q4, we expect lower production Due to a planned turnaround in Wheatstone, which was completed last week and repairs at the Alba Gas Plant in Equatorial Guinea.

Speaker 2

In addition, Our participation in the Rokan PSC in Indonesia ended in August. Production from Rokan averaged 84,000 barrels of oil equivalent year to date. We expect earnings from JKM related spot sales out of Australia to increase around $50,000,000 from 3 quarter from 3rd quarter Due to fewer spot cargoes as our long term customers increase deliveries heading into winter. We're also expecting 3 discrete cash items, a return of capital from Angola LNG, TCO's first dividend in several years And a federal income tax cash refund. There are no P and L impacts from these items.

Speaker 2

During 4Q, We expect to buy back shares at the high end of our guidance range. Finally, we're lowering our full year C and E guidance to $12,000,000,000 to $13,000,000,000 Primarily due to COVID related project spend deferrals into next year, lower non op CapEx in the Permian and continued capital efficiencies. To wrap up the quarter, we continue to make progress toward our objective of higher returns, lower carbon. We're more capital and cost efficient, generated record free cash flow and are taking actions to lower the carbon intensity of our operations and grow lower carbon businesses. We're executing a straightforward strategy that's expected to deliver value now and well into the future.

Speaker 2

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

Speaker 1

That concludes our prepared remarks. We are now ready to take your questions. Please try to limit yourself to one question and one follow-up. We will do our best to get to all your questions. Please Open up the lines, Katie.

Operator

Thank Our first question comes from Devin McDermott with Morgan Stanley.

Speaker 4

Good morning. Congrats on the great results. So my first question, Pierre, I think For you, I just wanted to ask for a little bit more detail on the reduction in the capital spending guidance for this year. It sounds like it's a mix of different factors. Some of Deferrals next year, some of it's mix of non op and efficiency gains.

Speaker 4

Can you just bridge the delta a little bit More detail for us and also talk about whether or not these deferrals or how these deferrals impact planned 2022 spend?

Speaker 2

Thanks, Devin. We lowered our CapEx guidance to $12,000,000,000 to $13,000,000,000 That's from our budget Of $14,000,000,000 and from our revised guidance that we had in the Q2 of $13,000,000,000 So in the last quarter, what's changed? Well, we continue to see non op spend in the Permian below our expectations. We did have some deferred major capital project spending tied to Hurricane Ida And the Delta variant wave. And then we've seen continued capital efficiency across in the Permian and across the portfolio.

Speaker 2

It does not change our CapEx guidance. Our CapEx guidance for next year and through 2025 is $15,000,000,000 to $17,000,000,000 We do expect higher CapEx in the Q4 and next year. The low end of that range is about a 20% increase From the midpoint of our revised guidance. So these deferrals are very manageable. And again, I would think from the original $14,000,000,000 budget, about half You can think of the deferrals and half I would say is capital efficiency and cost savings where we're getting the same results for less capital.

Speaker 4

Got it. Makes a lot of sense. And then my follow ups on cash returns. So very strong free cash flow in Quarter, your debt target is now below the bottom end of your target range. It's good to see the increase in the cadence of the buyback in 4Q.

Speaker 4

I guess my question is, What are some of the things you're looking forward to further increase that buyback target back to something closer to the pre COVID run rate?

Speaker 2

As you said Devin, our guidance for 4th quarter is at the high end of the range. So that's a $3,000,000,000 annual rate or $750,000,000 in the quarter. And as I said last quarter and I'll restate now, we'll increase the buyback range when Chevron's net debt ratio was comfortably below 20%. We ended 3rd quarter with a net debt ratio a little bit under 19%, down from 21% at the end of the 2nd quarter. So we just got below 20%, but we're fast approaching a net debt level where we could increase the buyback range further.

Speaker 2

As a reminder, Devin, I know you know this, we intend To main our buyback for multiple years through the cycle. And so we're positioning our balance sheet below our mid cycle range So that will enable us to continue buybacks even if the cycle turns.

Speaker 4

Got it. Very helpful. It makes sense. Congrats again on the strong quarter.

Speaker 2

Thanks, Devin.

Operator

We'll take our next question from Neil Mehta with Goldman Sachs.

Speaker 5

Yes, I just want to echo great results here. Pierre, I wanted to take a moment to talk about the global gas market. You spent a lot of time looking at this over the years. How do you see it playing out from here? And there are a lot of moving pieces as it relates to your gas portfolio, but One would be just any thoughts around spot cargoes and the other would be, it looked like you had some timing effects In the quarter that supported earnings, I would think that would unwind later on, but just any modeling advice there.

Speaker 5

So A lot of moving pieces there, but your thoughts on the gas portfolio.

Speaker 2

Thanks, Neil. First, I'd say that we are seeing high gas prices. It does feel more cyclical than structural, we've seen demand very resilient through COVID on natural gas in particular and supply has been impacted in part by lower Associated Gas, just a slowdown in some supply activity. So seeing demand and supply a little bit out of sync is something That we've seen in the past and we expect that markets will work. We're seeing a commodity pricing right now and we expect markets to rebalance over time.

Speaker 2

We have a very strong natural gas business. We have a nice position in North America, Australia, Eastern Med through Noble Energy and in Africa. And so we're well positioned there. There's not much in the short term that we can really do to increase supply. We have a position in the Haynesville And we could increase activity there, but that will have a modest impact on a company of our size.

Speaker 2

I think over the medium to longer term, We're working expansion opportunities, in particular in the Eastern Med, and I think this is positive, for signing up customers and enabling kind of The next phase of expansion there. So it's something that we're certainly well positioned for and we're looking to expand supply into it. In terms of the quarter, a couple of things. Yes, we did have a trading timing effect that was related to LNG. And that's really tied to how we manage our overall portfolio pricing.

Speaker 2

So we have customer contracts that are oil linked JKM Link and then we have various supplies and we try to match up the pricing. And in order to do that, we Essentially went long some JKM paper, which clearly was mark to market positive in the quarter. Now that's going to be matched against some physical deliveries in future quarters. So we call that timing because we expect to see that unwind when those physical cargoes Are delivered. And then the last piece of guidance we had was really on 4th quarter earnings effects.

Speaker 2

We guided towards $50,000,000 of Increased earnings in 4Q versus 3Q from Australia LNG spot cargoes. And that's just to make the point that we are going to have Spot cargoes, we have all 5 trains operating. The Wheatstone planned turnaround is complete. And we'll have actually more cargoes Delivered in Q4 when you think of contract and spot. But because it's heading into winter and most of our many of our customers in the Northern Hemisphere, Their nominations seasonally pick up heading into the winter.

Speaker 2

And so they will have higher takes under the long term contracts, which are oil linked. And that means we'll have fewer cargoes getting the higher JKM prices. So higher prices clearly in JKM 4Q versus 3Q, Figured cargoes, that's a net benefit of about $50,000,000 We also have some exposure out of our both Angola LNG and Equatorial Guinea. So you can think about another $50,000,000 or so from spot cargoes from those operations. So sorry, it's a long answer to cover the full breadth of natural gas this quarter.

Speaker 5

That's a lot of moving pieces. That's great. And then, Birrah, you're tracking really well on CapEx this year. Now, I think initially 14, then 13, now it looks like as low as 12. Next year, if I remember, CapEx is $18,000,000 to $17,000,000 is the range that you talked about.

Speaker 5

Is it fair to assume that the lower capital Spend this year would suggest that you'd be on the lower end of that range and any moving pieces that you would as we should think about as you set up the 2022 Spend level.

Speaker 2

You'll see us increase capital in the 4th quarter just to get to that $12,000,000,000 to $13,000,000,000 because we're at 8,100,000,000 Through 3rd quarters. And you'll see that in the Permian, 2 more rigs, 2 more completion crews. We'll have higher activity levels at Tengiz. We're going to Maintain peak manpower through the winter. And then activity tends to be back loaded, so back end loaded.

Speaker 2

So we have some project milestone payments. We have exploration wells that will be drilling in the 4th quarter. So you'll see an increase in Q4. I think we'll announce our 2022 budget In December, like we normally do, it will be within the guidance. And I think it's fair to say it will be towards the low end of the guidance.

Speaker 2

Again, even being At the bottom of the guidance of $15,000,000,000 of organic capital, that's at least a 20% increase off the midpoint of the guidance we just gave for this year. So Again, I don't want to get ahead of that, but you should expect us to see capital in the lower end of that guidance range.

Speaker 5

Good stuff. Thanks guys.

Operator

Thank you. We'll take our next question from Doug Leggate with Bank of America.

Speaker 6

Thanks. Good morning, everybody. Pierre and Mark, thanks for taking my questions. Yes, right. I hate to ask a housekeeping question, but you got to help me out here a little bit on tax.

Speaker 6

The way I'm thinking about this is that There's been a lot of changes in post mobile. Your mix has changed and obviously, we've got a lot more profitability in the U. S. The low tax rate. So can you help me is what's going on with tax sustainable or was that a mix issue or is there something unusual going on because we saw your Actually a bit low and I'm worried that we are carrying too high a tax rate going forward.

Speaker 2

The tax benefits in the Q3, which we cited, are real. So this is a deferred tax asset. It was acquired through Noble. At the time of closing the transaction, we put a valuation allowance against it because these tax attributes have a they expire at a certain number of years. And based on projections of financial performance at that time, we thought they would expire without us being able to use them.

Speaker 2

Our financial performance is so much stronger That we actually were able to use them in the Q3. So that reduces our taxes both on an earnings and on a cash basis. So it's very real and it's an additional synergy from Noble and it's not something that was included in our synergy estimates. That is not something that We'll do a review of all of our tax attributes at year end and see again what deferred tax assets Could have value going forward based on a change in conditions. But again, I would cite that that was in the all other segment.

Speaker 2

It's not something that you would expect to recur.

Speaker 6

That's really helpful. Thanks. I don't suppose I can appreciate to quantify what that Noble contribution loss, Karen?

Speaker 2

Well, it's the primary variance in that segment. So we talked about lower corporate charges and tax

Speaker 6

All right. My follow-up is really I hate to get the balance sheet issue, but obviously going back 5 years ago, You guys didn't carry any net debt. Admittedly, a lot of projects going on back then. But when you think about The cost of debt, which is obviously very, very low and we'll see if it stays there versus the way you think about Per share dividend growth. So I'm trying to think Exxon talks now about 20% to 25% has been the right level for them.

Speaker 6

It seems that you're heading well below that kind of level. So what is the right level for you, given that you can obviously refinance at a very economic level And obviously, step up the buybacks if you chose to.

Speaker 2

When I became CFO, I answered this question that we didn't have a hard target on our net debt ratio, but 20% to 25% is a good place for us to be through the cycle. And there could be times where we go above it. For example, when we showed our stress test, the only company in the industry to show a stress test last year at $30 brand for 2 years To give confidence to our investors that we could maintain the dividend, our net debt ratio did go above 25%. So that's appropriate. We do not need to be anywhere close to where we were before with no net debt.

Speaker 2

But when prices are above mid cycle, we should be Below the low end of the range, and we are. We got to less than 19% now, and we're fast approaching A range where we could increase our buyback guidance. So, it's very close to where we're at. All the excess cash that we'll be generating under these conditions, and we show that at $60 even prices well below Where we're at now that we can generate $25,000,000,000 of excess cash over 5 years, this is cash in excess of our capital and our dividends, All that cash will be returned to shareholders over time in the form of a rising dividend. And again, our dividend is up 12% since pre COVID, the biggest increase in the sector And a buyback that's ratable and we maintain through the cycle.

Speaker 2

We bought back shares 14 in the last 18 years. And so when we Set a buyback rate, we intend to maintain it through the cycle. That means we'll maintain it when the cycle turns and which means that we can, in fact, be doing it off of debt for some time period and we'll rebalance back into the range when we continue to buy back shares if and when the cycle does turn down.

Speaker 6

Let's hope that it's not anytime soon because last year we still got the scours from last year here. Thanks so much for your answers. I appreciate it.

Speaker 3

Thank you, Doug.

Operator

We'll take our next question from Jeanine Wai with Barclays.

Speaker 7

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

Speaker 5

Good morning, Maria.

Speaker 7

Good morning. We wanted to follow-up on Devin's questions and I guess Doug's question as well, getting back to the buyback. Pierre, you have already commented that you plan to maintain the buyback through multiple years through the price cycles, which is great. I think we remember prior commentary The goal is to not have to reduce the buyback once it started. So we wanted to just check-in on that and how you think of the trajectory of any buyback increases.

Speaker 7

It sounds more ratable versus opportunistic. We know there's a tremendous amount of free cash flow coming your way, but also it Seems like investor expectations are running alongside that versus being more ratable and that the strip is backwardated. So we just wanted to kind of check-in on the trajectory.

Speaker 2

Thanks, Jeanine. If you look back to our history, we've never ended a buyback program at the rate that we started. We tend to have increased them. And I think you might be right that we haven't decreased them. Look, I'm not opposed to that.

Speaker 2

We have a range. We're using the range, right? We're in the middle of the range in the Q3. It's the Q1 that we since we've resumed buybacks, we bought back shares in the Q1 of last year pre COVID. And now we're using the top of the range.

Speaker 2

And as I said, we're fast approaching a net debt level where we can increase that guidance range further. So no, Our focus is on being ratable and maintain it through the cycle. Investors, our investors, our shareholders Have different views on buybacks. Where we have the most common ground is do it consistently, and do it through the cycle when times are good and when times Tougher. And so we're setting the rates at a level that we have confidence that we can maintain it through a commodity price cycle.

Speaker 7

Okay, great. Thank you for that. Our second question is really on the Permian and the outlook on capital allocation. Can you just talk a little bit about what you're seeing on inventory and supply demand? And maybe how close are you to potentially accelerating in the Permian, A little bit beyond of what you've already laid out and I guess on that we know that it doesn't get much attention, but could you also be Thinking about increasing activity in other short cycle plays?

Speaker 7

Thank you.

Speaker 2

We're Going to increase capital in the Q4 and into next year. And so that'll be in the Permian and that'll be in other locations. Again, as I said, Even the bottom end of our guidance range, dollars 15,000,000,000 represents at least a 20% increase from where we expect to end up this year. And we're seeing that in the Q4. We'll see 2 additional rigs in Permian, 2 additional completion crews.

Speaker 2

We're beginning to see A non op pickup also, again, that's part of the reason why we lowered our guidance. Non op has been a bit below our expectations. And you can see it in other basins. We have a Great portfolio with a number of short cycle investments, but we're not changing our overall CapEx guidance range. Our CapEx guidance Anticipated that we would be, in a recovery mode and it would increase over time.

Speaker 2

And we showed a 5 year outlook on the Permian That shows that we can grow production as an outcome of a very capital efficient and also carbon efficient development of resource That we can grow that production from 600,000 barrels a day to 1,000,000 barrels a day. So we're executing our plan. There's really no change In what we're doing, it's playing out the way we expected and seeing a buildup in activity in the Permian and across other parts of our portfolio Is what we had planned to do and we're going to do that in a very capital and cost efficient way.

Speaker 7

Great. Thank you.

Operator

We'll take our next question from Phil Gresh with JPMorgan.

Speaker 8

Hey, Peter. First question here just kind of circling around the capital allocation piece a little bit more. Back in March, you talked about having $25,000,000,000 of excess cash or greater than $25,000,000,000 in excess cash over 5 years at 60, Implicitly suggesting the dividend would be covered around 50 ish Brents, I believe. I'm just curious if as you progress through this year, The performance that you've seen, etcetera, has anything changed with that to make you think that that break in would be moving lower or is that still an area where you're comfortable with?

Speaker 2

That's an area where we're comfortable with. It's just keeping oil prices constant, right? We're seeing Mark Nelson's Downstream and Chemicals Group performed very well. We've talked about natural gas pricing being strong both in North America, Europe and International LNG. So those things aren't held constant.

Speaker 2

So if you look at this quarter as a result, I think you'd see our breakeven would be a little bit lower. But in terms of Mid cycle assumptions for refining margins, chemical margins, natural gas prices and then An oil breakeven about $50,000,000 is certainly where we're at. Now that of course that changes as our dividend goes up and other things over time because it's a dividend breakeven. It's covering our capital and our dividend, but that math is still intact. We are a better company than we were a few years ago.

Speaker 2

We showed that chart where our costs are lower, our production is higher, and we're much more capital efficient. We can sustain and grow this enterprise With less capital and that helps us deliver higher returns and lower carbon.

Speaker 8

Got it. Okay. And then just a follow-up question On Wheatstone, there were some reports from your partners about reserves being written down there. I just wanted to get your commentary. How do you think about this?

Speaker 8

Does that mean something in terms of future capital requirements, given that it's a longer cycle project, just any commentary you'd have there? Thanks.

Speaker 2

It's unrelated to Chevron. So if you recall, the Wheatstone project was the first project in Australia and maybe the world, Where there was 3rd party the reserves, the resources came from 2 different joint ventures.

Speaker 5

And so

Speaker 2

it was Apache at the time and now it's Woodside. So it was really Woodside announcing that the fields that supply their portion of that's Told through Wheatstone that those reserves have a write down. Chevron does not have an interest, in those reserves. So the fields the Chevron fields That supply of Wheatstone are not affected. And again, it's unrelated to Chevron activity.

Speaker 2

It's only that they essentially We share the facility through them and those fields are also being processed through. Wheatstone is doing very well. We had a planned turnaround That covered a portion of Q3 and early into Q4. As I said, it was completed last week, and we expect to have all 5 of our Australia trains operating this quarter. And as I said, we expect more cargoes.

Speaker 2

There's a lot of focus on JACAM, but of course, our Oil Link contract prices Will also be higher because they adjust with oil prices are higher and then they adjust with oil prices on a 3 to 6 month lag.

Speaker 8

Great. Thanks for the clarification on that.

Speaker 2

Thanks, Phil.

Operator

We'll take our next question from Ryan Todd with Piper Sandler.

Speaker 9

Thanks. Maybe a high level question. You did your energy transition Spotlight event a little while back. You said a share of the capital budget at close to Low carbon businesses being close to 10% of the capital budget. You've seen one of your peers here in the U.

Speaker 9

S. Raise theirs to a similar level. As you think about the feedback that you've received since then, I mean, our view was that it was a pragmatic Balance between allocation of capital towards good low carbon businesses, but not too much to kind of protect returns dilution going forward. Is 10% of the budget as you've seen feedback over the last couple of months, do you view that 10% of the budget is enough? Or do you think That's going to be something where you're going to see increasing pressure to kind of creep that higher going forward?

Speaker 2

I'll start and then I'll ask Mark to talk a little bit about some of our renewable fuels activities in his portfolio. We have good shareholder support and alignment for our strategy and objectives of high returns, lower carbon. That's both lowering the carbon intensity of our traditional Operations and then growing low carbon businesses that leverage our strengths, our capabilities, assets and customer relationships. And they target the sectors that cannot be easily electrified, the hard to abate sectors. So this is things like air travel, industrial emissions, Heavy duty transport.

Speaker 2

The $10,000,000,000 of capital is connected to some pretty ambitious targets that go up to 2,030. So 150,000 tons per annum of hydrogen, 25,000,000 tons per year of carbon capture in storage. That's all consistent with that capital guidance. So we are more in the execution mode and getting it done versus, Let's say competing on CapEx targets. It's not easy to do.

Speaker 2

These are ambitious targets. They have challenges, lots of opportunity. But let me ask Mark to talk a bit about His portion of that on renewable fuels.

Speaker 3

Thanks for the question, Ryan. I could use a real tangible example. You think about our El Segundo Refinery and our diesel hydrotreater conversion, we've said a few things are really important to us when it comes to renewable diesel. We've said that The ability to sell it at the appropriate margin, the ability to have the right kind of feedstocks and the ability to be capital efficient is critical for us to be successful. In Southern California, in the El Segundo refinery are an example of all of that.

Speaker 3

We've already increased our sales. We're getting close to 40%, but let's say over 30% of renewable and biodiesel in Southern California. We have our Bunge Joint venture where we're working towards definitive agreements as we speak and yet they're already supplying us at the El Segundo refinery. And finally, and perhaps most importantly, Capital efficiency. We indicated in our energy transition spotlight that we expect to be a leader in the capital conversion Particular hydroprocessing units in our system, and we believe we can do that for less than $1 per gallon of annual capacity, and that's including Any pretreatment requirements that gives us the ability to produce both renewable diesel and conventional diesel just with a catalyst change if that's necessary.

Speaker 3

So when you step back and you think about that work that's been done initially at El Segundo where we did our co processing investment for very, very little money, we were able to test Tanking and piping and metallurgy needs, and now we're working towards a full conversion of that diesel hydrotreater here by the end Of next year, that won't be easy, but the team is working really hard on it making very good progress and that would be 100% renewable diesel capacity in over 10,000 barrels a day. Thanks

Speaker 9

Maybe a follow-up on some of your comments earlier, Pierre, where you mentioned When you were talking about gas markets and you mentioned the Eastern Med opportunities, we haven't talked about that much in a little while. In your conversations with potential buyers of that gas in the basin, I mean in the past, When it was operated by Noble, it was there was talk of everything between European targets to Pipelines to Egypt to floating LNG and all sorts of opportunities. Any thoughts on What may look like it makes the most sense there in the Eastern Med and opportunities for whether it's Shorter term debottlenecking and opportunities there versus longer term project development?

Speaker 2

All options are still on the table, Ryan, and it's commercially sensitive, so I don't want to show our hand in any way. I mean, the point is that is a great resource. There's some very low cost expansions that can be done and there's some larger expansions that can be done over time. What's really changed is that was in a geography that a year ago looked oversupplied for natural gas and now it looks much tighter. And so As you know, natural gas business internationally is really dependent on getting customers to sign up, and I think customers are more motivated now.

Speaker 2

And look, it's probably overdone. As I said earlier, we expect the markets to correct, but it is a better time for us to be engaging. So It's a great resource. In many cases, it's backing out coal. It has expansion opportunities.

Speaker 2

It's been free cash flow positive from the moment that we closed Noble. So it's just a great asset and it's well positioned now to have opportunities to grow in the future.

Speaker 3

Okay. Thank you.

Operator

We'll take our next question from Paul Sankey with Sankey Research.

Speaker 10

Hi, everyone. Pierre, if I could start with you. Would it be possible to try and normalize your exposure to LNG Given that there's so many moving parts over the course of the past year or so, I'm just noting that you'd said during your comments that Your spot exposure will be somewhat different in Q4 as a result of customers pulling long term contracts. If we could just take it apart a bit and sort of normalize into 2022, 2023, where are your volumes and how much of that is going to be Long term versus spot, if you could have a go at that. Thanks.

Speaker 2

Paul, we'll cover that more in our Q4 call when we give Full year guidance on a number of items. We have a long term contract that will begin next year. So it will take our Weighting to long term contracts a little bit higher. Again, we've been notionally around 80%. But that's something that's why we very consciously just provided guidance for this quarter It will change a little bit next year, but we'll do that on the Q4 call.

Speaker 10

Okay. I'll move on to Mark, but if I could Slip a quick one a few. In regards to modeling, do I assume that we put everything into buyback in terms of free cash flow? Or are there any other items that you would highlight, Maybe pension or something that we should just be aware of going into 2022 and how much we consider your buyback to be? Thanks.

Speaker 2

Over time, the vast majority of the excess cash will be returned to shareholders in the form of higher dividends and the buyback. We did a one time pension supplement last quarter. It was really tied to the very low interest rates From a year ago, it sounds like a long time ago, but under the Pension Benefit Guaranty Corporation rules, The funding requirement is fixed by on the year end interest rates. And so we were a little bit underfunded and therefore would have paid a little higher It's called a variable interest rate essentially higher than our cost of borrowing and so that's why we supplemented it. Obviously, we're in a much different place in terms of interest rates now You'd expect our pension contributions to be as they have been and we provide guidance on pension in our 10 Q filing.

Speaker 2

So I would not expect anything on that end. So again, if you go to our financial priorities, Paul, you know them well. Sustain and grow the dividend, it's up 12% since pre COVID, the biggest increase In the sector, our capital guidance is going to be up, but it's no change from the guidance range and it's in a very tight guidance range and very capital efficient and Lower where it was pre COVID. We're going to pay down a little more debt. As I said, we're fast approaching a level where we can increase our buyback range.

Speaker 2

And so then the balance is excess cash and over time it goes to shareholders. We're not going to sweep it out each quarter because investors are very clear that they want us to maintain A buyback through the cycle.

Speaker 10

I guess that would mean no specials.

Speaker 2

I think it's time for you to ask the question to Mark.

Speaker 10

Mark, Thanks, Pierre. Mark, a very general question, but could you talk about how capacity is changing down Both in refining and in chemicals, because I know we're adding a lot of chemicals, obviously. We're also shutting down a lot of downstream. How's Firstly, is there any way that Chevron is dramatically changing its capacity and exposure downstream? And secondly, could you talk about that in the context of where you see U.

Speaker 10

S. And global capacity, I know this could take 2 hours, I apologize, but if you could generally say how global capacity has shifted and the more numbers could give us the better. Thanks.

Speaker 3

Yes. Thanks, Paul. So let's start with the refining side of the business. We And use margin as the proxy for capacity being utilized. We said demand has to recover for high value products, Inventory has to fall in the traditional ranges and then we need some degree of refinery rationalization either closures or conversions Throughout the system, if you're in the U.

Speaker 3

S. Today, I think you're seeing much of that demand recovery with jet Still to come and that's even with the offices not completely open and so some restrictions in place. Inventory Tending to find itself in traditional boundaries and starting to see some closures and or conversions In some of our markets, especially the U. S. West Coast, which means the market could be could actually be tight on things like motor gasoline, even jet 5 or 6 Years from now.

Speaker 3

So you see that in the United States. If I shift to Asia, I would say that demand recovery on Jet is a little bit Behind that of the U. S, especially given our exposure to Southeast Asia, inventory reduction falling into those ranges is starting To happen some of that with China stopping some of its exports for the moment, but demand catching up with refinery capacity in Asia still needs to And that means that we both need some perhaps some rationalization as well as demand just to catch up with the capacity that's there. And so my high level Comment would be that in the United States, we're seeing the actions to bring refinery margins into balance over time, getting closer to historic ranges and just a half phase And then for the petchem side of the equation, petchem margins have had a strong run This year, on the back of good demand and considerable supply disruptions, we would expect to see margins come Off as we get to the Q4 normal seasonal type of drop off, but we're actually preparing for with capacity growth over the next Few years, we expect that to outpace demand. So we're at that part of the cycle.

Speaker 3

And even in 2025, we're presuming we'll be on the lower portion Of the margin cycle. So that means that there'll be a period of catch up there in regard to demand catching capacity. Hope that got to your issues.

Speaker 10

You did. Thanks, Mark. And just from a Chevron point of view, is there any major changes in your capacity over the next 5 years that you anticipate refining and chemicals? Thanks.

Speaker 3

Other than the comments we've made about you remember, it was about a decade ago that we did much of our, what I'll call, rationalization, meaning taking Things out of our portfolio and we've highlighted our energy transition spotlight that we have this opportunity for this very capital Efficient conversion of individual hydroprocessing units and we will certainly do that over the next decade to get to that 100,000 barrels a day of RD SAF capacity.

Speaker 2

Thanks, Paul. We're going to have to go

Speaker 11

to the next slide. Thanks, Paul.

Operator

We'll go next to Roger Read with Wells Fargo.

Speaker 12

Thank you and good morning. Pierre, I'm going to hit you on capital returns, buybacks and balance sheet. No, I'm just kidding. Mark, I would like to ask you about the Group Oil Base 3 acquisition, kind of how that fits in the overall structure and And whether or not we've seen some stories about renewable feedstock for Group 3, maybe how you

Speaker 3

Yes. Thanks, Roger. As mentioned in the prepared remarks, we're excited about The announced acquisition of Neste's Group 3 base oil business and the Nextbase brand. And the reason for that is it's a very capital efficient Acquisition of both offtake of supply, appropriate qualifications And the brand, Nextbase brand itself. And what that does for us is it allows us to expand our offering.

Speaker 3

So we're going to add that to our existing Group 2, 2 plus and Novi offering to have a complete offering for the base oil needs for our customers in the future. And think about that, that Novi brand that we've talked about. I think in the energy transition spotlight, we shared that Walmart would be Selling online our Havilland Pro RS, the first renewable lubricant line, and we've actually brought some of that forward. And Next Monday, we will have our installer base in North America, specifically the United States and Canada in particular, Running a whole line of Havilland Pro RS. So we're creating that demand for the renewable portion That offering, it really gives us something where we can be that supplier of the future for our base oil customers.

Speaker 3

Thanks for the question, Roger.

Speaker 12

Yes, absolutely. And then, if we could come back to some of the things on the CapEx, you referenced delays out of the Gulf of Mexico due to the storms, which totally As you look at the development and some of the exploration, I think you're looking to do out there in the next couple of years, is there any change to that or Any sort of change in the order of projects we should pay attention to?

Speaker 2

No, we have a steady Stream of projects really with Anchor that has been underway, Whale that recently went to a final investment Decision in Balmora, which is coming along. So you'll see a very ratable development program. Gulf of Mexico is a high return, low carbon asset, Some of the lowest carbon intensity barrels in our portfolio in the single digits, and is a business that we've been invested in For decades, have know how and some competitive advantages, and can find attractive investment opportunities. So it's Sort of a modestly growing part of the portfolio. If you think of the biggest growth that we have going forward clearly is in the Permian, which I referred to earlier.

Speaker 2

Pangi is a project that we're investing in and this project is going very well and that project will come on in a couple of years. When you get to Gulf of Mexico, the Rockies or Colorado, a few other places are also have very attractive investment opportunities that can deliver Both higher returns and lower carbon.

Speaker 11

Thank you.

Operator

We'll take our next question from Biraj Borkhataria with RBC.

Speaker 11

Hi, thanks for taking my questions. Two questions. The first one was just thinking about the balance sheet, because of your Servatism and the way you manage your balance sheet, you've been able to make some countercyclical moves and Noble was obviously the most recent one. Given we're at the high point of the cycle now, can you talk about any plans to accelerate asset sales? I know it's not needed for the balance sheet, I'm just interested to hear whether you think there are any opportunities out there.

Speaker 11

And if so, are they across upstream, downstream or chemicals? And the second question is on Tengiz. It's good to see that the dividend come through after a number of years. Are there any loan repayments due in 2022? And then finally, just a quick comment to say thanks for the PCI calculation So which you published, it's actually quite difficult to dig into some of those figures and understand all the variances.

Speaker 11

So I appreciate the transparency there.

Speaker 2

Well, thank you, Biraj, for recognizing PCI. Our teams will be very happy to hear that. We wanted to make a tool that was Transparent where you could use it for other companies because I know comparability is of interest to investors. And so it's based on, Again, transparent reporting data and comparability. And so thank you for taking advantage of that and encourage others to check it out.

Speaker 2

Let me just talk about TCO because as we look back, we had a very successful spring and summer campaign there. We hit our productivity targets And we achieved a lot of our milestones when we had a full workforce. So we had a delta variant wave, which caused some higher levels of isolation In the middle of the Q3, we ended the quarter with positive rates very, very low and we're back to our full workforce. And as I mentioned earlier, we intend To maintain a peak manpower workforce level through the winter months, we have a vaccination rate over 85% for that workforce. So We're well positioned to make a lot of progress this winter.

Speaker 2

Now we have to be thoughtful about it because it can get cold there. So we're sequencing the work in a way That we're saving work that can be done indoors or in sheltered locations during the coldest months of the winter. So No change clearly in the guidance that we provided on Q2 in terms of budget and schedule, but I wanted to give an update. Things are going very well in Tengiz And we're looking forward to a very productive winter season there. In terms of the dividend, you're right, it's the 1st dividend in 3 years, so that's nice to see.

Speaker 2

We did have a modest loan repayback that occurred last quarter. And look, we'll give guidance on 2022 just like with Paul's question When we look forward. It will depend clearly also on oil prices, but that's something that we'll give guidance on our 4Q call. In terms of asset sales, yes, we acquired Noble when or announced the acquisition when Brent was in the low 40s. And now Brent is in the low 80s.

Speaker 2

And so it's a commodity business. It has cycles, ups and downs. And when you buy or sell assets, Timing makes a difference where you are in the cycle. And of course, strategic fit and all the elements, we're very, very pleased With the Noble transaction, we talked about the timing of it, the first to do it, the synergies that were doubled and the tax benefits that we saw This quarter and interest cost savings. So we did tender a number of bond offerings earlier this month.

Speaker 2

A lot of those bonds were Noble bonds. Again, that was not included in our synergies because we weren't quite sure we could achieve that and we'll save over $100,000,000 And interest cost savings. So Noble just keeps contributing to the company and that's part of the reason why we're a better company now Than we were several years ago, but it's a different market. So yes, I view it more as a seller's market than a buyer's market right now. And so you're seeing us modestly increase Some assets that don't compete for capital as well in our portfolio.

Speaker 2

In fact, one of them is our position in the Eagle Ford. So that was a Noble Legacy position. Chevron Legacy was not in it. So we don't have quite the scale that we would like. But again, essentially buying that position at $40 and now we have it on the market.

Speaker 2

That's in the public domain. And obviously, we expect to get Much higher value than for what was implied in the purchase price. We have some other U. S. Onshore assets, that are on the market again that we feel are very attractive To a lot of industry players, we just won't compete for capital as well in our portfolio.

Speaker 2

Thanks, Biraj.

Speaker 3

Okay. Understood. Thank you.

Operator

We'll take our next question from Paul Cheng with Scotiabank.

Speaker 13

Hey guys, good morning. Two questions, please. The first one is for Mark. Mark, you guys did the Pasadena refinery, and at the time, you're saying that it's one off because Tom Piment, your Pacific Rimuru refinery. There's a lot quite a lot of refinery that's available for sale in here.

Speaker 13

So I want to see with the substantial amount of the refining capacity being shut, does it Change the way that how you're looking at that business or that you think you already have sufficient of the capacity and Supplementary and you really don't need to add. And also in the retail marketing, some of your peers that have been Aggressively, building that up and including in the U. S. And you guys have out of that business for more than 10 years. And is there any And to going back, so that on the energy transition, including in the EV charger and all that.

Speaker 13

The second question is for Pierre. You talk about, say, the TCO dividend. How about the Angola LNG? Can you give us some idea that if the current commodity price hold, Should we assume every year that both Angola LNG and the TCO is going to pay the dividend? And Any cost sensitivity you can provide that if the change in the oil price, how's that impact on that dividend payout going to look like?

Speaker 3

All right. Paul, thank you for the questions. I'll take them, I guess, in reverse order. I think your second question was really about Tail Marketing. And as you know, we have 3 world class brands and we've taken a capital light approach To selling our branded fuels.

Speaker 3

In fact, one of the metrics that we often look at is the OPUS brand power rating and we continue to be well at the top Of that list and what that means is the majority of our retail sites around the world that you would see are owned by retailers Who have specifically chosen our brand. And so we have our brand, our fuel and generally not our capital. We also happen to have one of the strongest retail convenience Franchising offerings out there, extra mile that you've probably seen. In fact, I think we hit our 1 thousand site this year with very, very little Attrition. And so we believe that our limited capital approach provides us the majority Of the margin and sustainably delivers high returns and still allows us to stay connected with customers.

Speaker 3

And as part of that offering to customers, today We have EV charging stations in 7 countries around the world and we're partnering with our retailers to continue to expand that offering as customers Actually, need it. Your second question was, I think about the refinery portfolio in general and maybe Pasadena Specifically, we're very pleased with our refining portfolio today. And it's really because of that hydroprocessing capacity that we have across Our system, it gives us flexibility to deal with the fuels of the future and renewable fuels in particular in a very, very capital efficient way. Specific to Pasadena, again, we have an opportunity there. The premise of the acquisition continues to hold for us in processing our equity crude, Being able to supply our own service stations in the Texas, Louisiana area and then of course having the intermediates back and forth between Pascagoula and Pasadena, that's all working as we would expect.

Speaker 3

And we've shared that we think there's an opportunity there to have very efficient Expansion of light tide oil processing capacity and we've hinted that that's going to be a hydro skimming focus. We're working on that Real hard and look forward to talking more about that next year. Thanks for your question, Paul. Up here?

Speaker 2

Yes. And on Angola LNG, so it's in our looking ahead slide, Paul, we guide towards $300,000,000 of return of capital. It's essentially a dividend. It's just kind of an accounting characterization of it as return of capital. It's Cash is the bottom line.

Speaker 2

And in terms of guidance going forward, just let's just say Angola LNG does sell into the spot market essentially both on oil linked strips And into Europe TTF or international JKM markets. So it does have exposure to international natural gas pricing. $300,000,000 will be a nice return of capital here in the Q4. And again, just like with Paul Sankey's question, we'll provide guidance for our full LNG portfolio on the Q4 call for 2022. That will include Australia, Angola LNG and our interest in Equatorial Guinea, which again is another Asset that was acquired through Noble Energy.

Speaker 2

Thanks, Paul.

Operator

We'll take our next question from Manav Gupta with Credit Suisse.

Speaker 14

Hey, guys. Two questions. I'll ask them upfront. The first one is, I'd like to pick your brain on the mid cycle chemical margins here. Historically, we thought the mid cycle would be more like $0.25 Obviously, right now, we are more like $0.65 And even though you did say now the margins will decline, Some of the bigger chemical ethylene players are out there saying, we will settle for the next 2, 3 years above the mid cycle level.

Speaker 14

So While the mid cycle could be 25%, you could still see 35% to 40%. So that's the first question. And the second question is you're seeing you get into the CNG distribution for the first time. And I'm wondering if this is associated with your strategy of developing RNG And basically controlling the entire value chain, so you can distribute your RNG that you're going to produce through your distribution network.

Speaker 3

Thanks, Manav. Got your question. So first on petrochemical margins, we indicated as we look to the Longest of terms, we expect petchem demand to continue to grow in line with the long term GDP growth. We believe in kind of the next 4 to 5 years, we do see capacity growth in the next couple of years going past demand, which brings us towards the bottom portion Of the margin cycle. And so I think we shared in our Investor Day discussions last year that we brought our view down and it's again airing on the side of Conservative perhaps, but that it was going to be $0.20 per pound in regard to where we could expect those margins over time and anything above that, of course, We will take and it drives us in our CPChem joint venture to make sure that we continue to work on our unit cost reductions, which they have done a very good job on and we'll continue To do going forward.

Speaker 3

And so we see that is our number looking forward. And then when I get to your comment on the RNG Portfolio, you read it exactly correctly. Our close on the 60 American natural gas Besides, it's really about us leveraging our strengths. When we talk about renewable natural gas, we say a couple of things. We say it leverages our strengths and bio feedstocks are really important.

Speaker 3

The strengths in particular are value chain, activation and partnerships. And the two areas where you can see this at play Actually, in the formal presentation would be in the gas that's now coming from Cal Bio from all of the farms that we have there And then our BrightMark activity experiencing their first delivered gas. On the 60 CNG sites that American Natural Gas CNG sites with Mercuria, that allows us to follow the request of our customers, if you will. We're trying to get CNG To those customers throughout the our portfolio and that's the first step in doing it and a platform for us to grow.

Speaker 14

Thank you.

Speaker 2

Thanks, Manav.

Operator

Thank you. Our last question will come from Jason Gabelman with Cowen.

Speaker 8

Yes. Thanks for squeezing me in. I may have missed it, but can you just discuss the drivers of why TCO is declaring this Dividend now and kind of what we should look to assess if they'll declare it Next year, and just some background on how we could calculate that. And then my second question, Just on cost inflation, what you're seeing across your projects, if it's impacting TCO at all or any of your Either large or sorry, long cycle projects or short cycle in the Permian? Thanks.

Speaker 2

Thanks, Jason. Yes, I should have mentioned, no, TCO is paying a dividend and it was in the plan, but it could be higher than was planned, which is why we've guided to a range, Primarily because two things. 1, clearly the macro environment is stronger. So, it produces a light oil that attracts Trades to a tight discount to Brent and with the physical terms and the rest of it, it's generating excess cash. And also we've seen At the project, some real cost savings.

Speaker 2

Again, we've seen some deferrals, but that would be factored into retaining cash in TCO. We've seen some underlying greater efficiencies and we've seen some foreign exchange benefits there. So it's a function of it, Things going well both from a market environment and from an execution of the project. Again, in terms of 2022, we will provide guidance On the Q4 call, like we have in prior years, we've guided historically to that cash flow line, which is the difference between dividends And affiliate earnings, I think we also might just give separately a range on expected dividends from Tengiz and other major affiliates. And then in terms of cost, we're not really seeing any cost increases.

Speaker 2

Rigs U. S. Onshore rigs are maybe creeping up, but they're still well below Where they were pre COVID. And in general, the industry is operating below capacity. So although there are pockets of goods and services that we use that are tied to the general Economy, like steel and clearly steel is up, but the majority of our costs are tied to industry specific major equipment And that's still operating below capacity.

Speaker 2

So it could increase in the future. I know there's a lot of talk about it, but what we're seeing up to date is costs are well under control.

Speaker 10

Thanks.

Speaker 1

I would like to thank everyone for your time today. We appreciate your interest in Chevron

Operator

Thank you. This concludes Chevron's 3rd quarter 2021 earnings conference call. You may now disconnect.

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Key Takeaways

  • Chevron reported Q3 2021 GAAP earnings of $6.1 billion ($3.19/share) and adjusted earnings of $5.7 billion ($2.96/share), its highest in over eight years, generating record free cash flow and reducing net debt to below 19%.
  • Upstream performance improved as operating costs fell, production rose 7% year-over-year (driven by the Noble acquisition and lower curtailments) and adjusted return on capital exceeded 13%, enabling the resumption of share repurchases.
  • The Downstream & Chemicals segment delivered its best adjusted earnings in more than four years, helped by jet fuel demand recovery, digital and maintenance efficiencies, and CPChem’s strong market response with GS Caltex’s mixed-feed cracker running ahead of schedule.
  • Chevron is boosting low-carbon ventures by acquiring a 60-site CNG network, advancing biogas and sustainable aviation fuel projects, announcing the purchase of Neste’s Group 3 base oil business, and issuing an updated climate resilience report with a net-zero 2050 aspiration and a new portfolio carbon intensity target.
  • Looking to Q4, the company anticipates lower production due to planned turnarounds and the Rokan PSC exit, expects ~$300 million from Angola LNG plus other cash items, will execute buybacks at the high end of its guidance range, and has lowered 2021 capital expenditure guidance to $12–$13 billion.
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Earnings Conference Call
Chevron Q3 2021
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