Chevron Corporation (CVX) Earnings Call Transcript & Summary

Hi. Good morning. This is Phil Gresh, North American integrated oils and refining analyst at JPMorgan. Up next at the conference, we have Chevron's Vice President and Chief Financial Officer, Pierre Breber. Pierre, we're certainly happy to have you at the conference here. We're keeping you busy these next few days amidst your own leadership forum in California, internal leadership forum, but with the fireside chat, the ESG panel tomorrow, which I'm really looking forward to as well. So thank you so much for your participation in this event.

Thanks for having me, Phil. I appreciate it.

So I have a lot of questions listed out here that I want to hit, a lot of topics. So I think we'll just jump right in, if that's all right. Let's just start with the macro, you can maybe lay the groundwork a little bit. How are you viewing the macro environment today based on the data points you're seeing on the ground? Obviously, it's been an absolute whirlwind year, and it's only June. But what are you seeing across upstream, downstream chemicals from a demand perspective right now?

Yes. Look, it has been fast changing. It sort of has stabilized, I guess. We're still seeing mogas down in the United States, about 20% from pre-COVID. We don't have a big presence in China, but clearly, China is back to pre-crisis levels. You can go to Germany and France and see road demand pretty close to or at pre-crisis levels. So it varies. But clearly, the mogas is recovering as shelter in place is being relaxed, the economies aren't fully open. Distillate never got hit as hard, so it was maybe down 20% and now maybe it's down 15%. It's recovering a little bit. Jet, obviously, is the big -- hit the most and was down 80% probably at the peak, maybe it's down 60%. To be honest, I'm not following it quite as closely as I was during the depths of this crisis. But our plan is -- it's hard to know where this goes. It's obviously uncertain. But we're planning for lower for longer, see more headwinds to demand than tailwinds. You could see with lower gas prices, people buy bigger cars, folks are less likely to use public transportation. So you have some of those positives. But do people commute like they did? That seems unlikely. Jet travel is going to take time to recover. And then petchem, we called it flat on our first quarter call and still hanging in there. So I just haven't seen as big impacts. Again, it depends -- some of the manufacturing has gotten hit, but other products tied to health care, hygiene, packaging, that has increased. So net-net, it's been relatively balanced. And where it goes from here really depends on how the economy recovers. If there's a second wave, how this health crisis is managed to enable the economy to recover.

And I guess as you plan out for the second half of the year and looking out to 2021, it sounds like you're planning on a scenario where demand could still be down from, say, the 2019 levels into 2021, if I'm understanding what you said correctly.

I mean yes. We don't know. It's uncertain. But I mean we showed a stress test at 30, so that clearly has a demand. We'd rather be wrong on the upside than the other way. It's very possible we could see everything but jet back near pre-crisis levels. You still have -- you have big unemployment. So hard to see employment coming back. So there's an income effect, there's fewer people driving to jobs, even for the folks who have to go to work. So yes, more likely to be lower, but we don't know. I mean, in our 2-year stress test, we did have a recovery in downstream margins. So again, our stress tests had $30 crude oil. So in a scenario where demand comes close to pre-crisis levels, you could see refinery have a -- refining have a much better year next year than they're having this year because you could have cheap crude and you could have demand pretty close. And so that's within our planning assumptions.

Got it. Maybe just touch on California for a second since you're such a large player in the California market. I mean -- and California is uniquely, I think, been hit by the COVID situation. What are you seeing from a demand perspective there? And how do you see utilization progressing? We've heard from some of your peers that California has been one of the slower markets to recover.

Yes. Well, it's not -- I mean the numbers I shared are averages, but they apply to California, too. So our motor gasoline demand is, again, 80% of pre-crisis here. I mean, jet fuel is, again, is similar. So I wouldn't say that we see a big difference. It shut down earlier, certainly relative to our market served by Pascagoula, which is Florida and Georgia and those states. And those states have probably started up sooner, but we're not seeing big differences. We have been managing utilization, and this will be the path forward is looking at fundamental economic recovery and demand. I mean this is -- there's obviously a supply aspect to this, but there's a big unprecedented demand effect, and it's really seeing the signs of more driving, more road travel, more air travel over time, more industrial activity, I mean all the pulls on refined products. And then you'll just ramp up utilization. We're not building inventory. We're not drawing down inventory. Our downstream, our refining and marketing team have been able to kind of keep the production and the offtake. And we have a integrated value chain, so we have market relationships, and our wholesalers and jobbers that move our products. We have our own service stations in some cases. And so we've kept that relatively balanced. And as demand goes up, we can sort of manage it up. So the downstream has been able to deal with the demand shock better than the upstream because the upstream, obviously, is putting a lot into storage for a while, and there's been some curtailments, but not to the same. The upstream is not operating at 65% or 70% like the refineries have been.

Yes, actually it leads into my next question relative to your upstream shut-in guidance that you had provided in your last call. Maybe you could just -- for those who don't remember, you could remind us what the guidance was. And then as you look at the pricing environment, obviously, a lot's changed, has gotten better. Flat prices are up. Basis differentials are tighter. So as you look at June and July, where would you say things stand relative to how you were thinking about it a month or so ago with the call?

Yes. So our earnings call was May 1. It was when the May crew program had just been finalized a little bit before then. And it was the depths, right? It was obviously when the famous negative $37 print on the futures contract, but even the physical was down in 15% to 20% and with differentials, we were getting to some really low netbacks. And so like others, we made the decision in the U.S. to do some curtailment. And outside the U.S., we actually had some effects in April that were more local demand related, both natural gas, like in Thailand or Argentinian crude that goes to local refineries when they -- refineries cut back, you couldn't export. And so that there were some cutbacks, relatively modest in April. And then in May or June, our guidance was 200,000 to 300,000 barrels a day of oil equivalent for May, and 200,000 to 400,000 for June because May was more certain and we just expanded the range for June, not knowing where prices were going to go. We didn't expect prices to recover quite this quickly. No, they haven't fully recovered. But I mean we thought they could stay in that $20 range longer than they, in fact, have. So if you think of that 200,000 to 300,000 barrels a day for May and 200,000 to 400,000 for June, about half is outside the U.S., half is inside the U.S. The half outside the U.S. is primarily OPEC+ related, but has some of these local demand effects; and the half in the U.S. is primarily economic decisions to store in the ground if you want to think about it and sell at a higher price. June, we haven't updated the guidance, but the high end of the range, obviously, is much less likely now that we've had prices recovers because the economic choices we made, again, when you had -- the other really key, it's worth just taking a second for. When you sell your crude, let's say, in May, you're selling it in April and you're agreeing to differentials. But the actual flat price is the daily close of the futures contract in May, which is really the June contract and the July contract. So you really don't know what you're selling it for because if prices would have kept going lower, you could have had even lower netbacks. It turned out, prices went up. So it's not like it's a decision where you can lock in and guarantee and you know you're making the right decision. You're making it on the best assessment. We're able to curtail in the Permian by largely just dialing back our pumps. And so you are not shutting in wells, so it's a very easy thing to do. And so we just cut it back some, and then we'll see where we go. So I won't comment on third quarter. But it'd be fair to say, at higher prices, you'd expect a lot less curtailment in U.S. Outside the U.S., OPEC+ agreements, they're going to continue.

And in terms of the U.S., just operationally, if the prices were right, I mean, could you bring 100% of it back in July operationally? Or are there any constraints around that?

No. I mean we could bring it back. I mean, because we have the takeaway, obviously, and all that, not an issue. So yes, again, it's really just the speed of these variable speed pumps, and we can bring it back.

Got it.

And the bigger effect, I know the curtailment's got a lot of attention, and the curtailments are very relevant in the short term. But the bigger effect is the withdrawal of capital, right? We gave guidance in our March 24 market response press release, so we had our Investor Day in March 3. Three weeks later, we obviously had to change a lot. And our guidance on Permian was the exit rate was going to be 20% lower by the end of the year for our Permian production than we had just guided on March 3. And so the curtailment is short term. The impacts of the capital investments, first of all, they have a bigger effect, and then obviously, have a longer duration because it will take some time before activity returns to the Permian.

Yes. That leads to the next set of questions here. As we look out longer term and with respect to all the guidance that you provided in March and how quickly the macro environment subsequently changed, I mean, how do you think about -- let's just start with the Permian side. Capital, I think, in March, was $4 billion. Now it's $2 billion for this year. And as you look out to 2021, is $2 billion in capital a number where you can actually grow production into 2021? I think your exit -- your implied exit '20 versus '19 was flat for the Permian embedded in that. But just how do you think about a $40 oil world and how different it would be versus the $60 world that you had talked about in March, if that were the case?

Yes. I mean, so we showed a 2-year stress test at $30, and you could see there was cash capital. That's cash capital that shows on the cash flow statement in that stress test because we laid out the components. And you could see that it was roughly equivalent to the $14 billion that we've now guided to for this year. So if it's a $30 world, you'd expect us to stay very low. If it's a $60 world, you'd expect to see something like what we guided to previously. But our financial framework at $60 had that buyback, which was equivalent to about $10. So let's call that a $50 world at our Investor Day without a buyback. $40 is in between, and it's just -- I can't comment. We just -- we're not just going to look at does the price hit $40 and then capital is going to come back. We're going to look at demand. We're going to look at what others are doing. We're going to look at what OPEC is doing. We're going to look at the economy. I mean we're going to look at a -- we want to be on a sustainable path. I mean there's a lot of volatility in the equity markets, in the commodity markets. There's still a lot of uncertainty about demand recovery. Is there a second resurgence? The reopening is, again, is not clear if how sustainable it is or will continue in the same trajectory. So there's just a bunch of questions. And our decision fundamentally on capital was we don't need to sustain short-term production. I mean the price signal is don't put more capital to add production in a $30 or $20 world. And $40 is a bit better, but I'm not sure $40 is a price where capital is a sustainable price. So I don't think $60 is likely either. I think $60 shows that it tracks maybe too much capital. So it's something in between there. So something closer to $50 is more how we would think about it. But again, it won't just be a price. It will be a combination of factors that we'll look at. And then the buildup will be much more gradual than the ramp down. You can release rigs and crews a lot faster than you can bring them on because they need to be trained, they need to be efficient, they need to be safe, you need to pull back workers from wherever they'd gone to find jobs. We've kept a base of rigs and completion crews. So we have a base to build off of, and you can take them off of the 5 rigs we have and sprinkle them around new rigs as you bring new rigs in. So this is all, again, we're -- our eye is on long-term value, not short-term production. And so that's what we're trying to manage to.

Sure. So if I look at then this new budget, $14 billion, roughly $2 billion in the Permian, I think on the last call, you talked about a $12 billion sustaining capital budget. Now obviously, Tengiz is not sustaining capital. It's growth capital. So there's that wedge in there. But is this kind of -- is that the framework here then, that at this type of capital budget, that production outside of the Tengiz project would be more flattish entering '21 and the Permian also would be more flattish?

No, no, no. I mean we've been, I think, very clear that at our $14 billion annual, which is really a run rate of 40% because the first quarter was kind of normal, you have to be the second half of the year, you're running 40% below. And because of Tengiz, and if you take that out, and then you've got downstream and exploration, that the sort of the capital to sustain base production and shale and tight production, we're below that level. We've cut $3.5 billion out of the $11 billion of base and shale and tight. And so that is not a level that sustained short-term production. Now we have, as you said, Tengiz coming on so you could let production decline and you would still have Tengiz, and you might keep it flat. I mean we'll update the guidance on all that. Well, the point is we're responding to price signals. And again, there is no value for our shareholders to spend capital just to sustain short-term production to earn a low return at $30. We'd rather preserve the balance sheet and save the cash. And we're not losing the option. The Permian, the resources in the ground, the profile is still achievable. But no, the profile that we showed or this investment level does not result in sustained short-term production. What I did say on the call is $10 billion, as an analytical construct for existing production, not any new good fields or expanding like Tengiz, excluding exploration, excluding downstream, that $10 billion can sustain our upstream production for a number of years analytically. But again, we're below that number right now. So the longer this goes on, you're not seeing it this year because this year's production was largely decided by last year's capital, which was closer to $20 billion. So next year's production, which we haven't guided to yet, you'd expect it to be different because we're investing at a lower amount, and that's going to show up in months and into next year. And then we'll just see when activity comes back what that does. But you would not expect our production. And that wouldn't make sense. I mean that's why the 20% exit rate, you're right, it ends the year where we started, but the trajectory is 20% lower than we previously guided. That's a pretty significant effect, and that doesn't turn around like curtailed volumes. Curtailed volumes can come back almost instantaneously when you increase the pumps. To bring capital back is a longer process.

Sure. Okay. Just coming back to that slide where you had talked about covering the dividend at $30 for 2 years, which would be leveraging the balance sheet obviously at $30. Mathematically, if I look at -- does that imply that, I guess, something in the $40s, maybe mid-$40s, would be required to cover the dividend at full with free cash flow in your mind? I know you're talking about the $50 framework.

Yes. I mean, it's -- the oil breakeven is -- I mean, we use it, but what's your downstream assumption? What's your natural gas price assumption? What's your LNG price assumption, right? There's a bunch of other factors. So our breakeven in first quarter with ex-working capital was a little bit under $50. It will depend on all these other factors and what -- what they are to know what the oil equivalent is. What I can say is, look, we're taking actions to get our breakeven into the $40. So if you take your capital down, cost down, we have $1 billion next year and a run rate, $1 billion this year, that's kind of tied to activity levels in currency and other cost reduction effects that are more market response actions. All of that takes our breakeven down. But downstream's not -- has weak margins. Like, there's headwinds, too. And so it depends on all those other assumptions. I won't quote a number. But certainly, what we're trying to do is get it into the $40s, rely on the balance sheet, which was the strongest balance sheet in the industry coming into this, that we show has the capacity to absorb 2 years of $30, invest in the business appropriately and pay the dividend. And we wanted to address that question very, very clearly. And then we do expect, I mean, capital is being withdrawn, we do expect prices to recover. That's unknown where those settle, but something in the $40s is a decent place to be.

Yes. Okay. Let's switch topics to the M&A environment. How do you think the M&A environment looks today following this whole COVID situation across the industry more broadly? And where does Chevron stand on desire to do M&A? And I'm thinking within the Permian, but even outside the Permian.

Yes. So obviously, I'm not going to speculate about it. I mean, one thing I would say is, this sector, consolidation seems like -- makes sense, right? I mean the hard thing has been attempts that have been made haven't been rewarded by shareholders for various reasons. But when we talk about the sector, Phil, we have to talk about a sector that's not done well for shareholders, right? Underperformed the S&P 500 for the last 1 year, 2 years, 5 years, 10 years. E&P sector, in particular, that's been hit very hard for lack of capital discipline, not generating free cash flow, not paying dividends. A lot of that correction was happening earlier, even pre-crisis, and I think it just exacerbated when you're in a lower for longer world. So I think this -- I don't think this is going to be 2016, 2017 where everyone just goes back as if the price reduction didn't happen. I don't think investors are up for that. Not everyone can grow 5%, 8% in an industry that grows at 1%. So I think that's the macro question. For us, M&A, that's always a high bar, willing for quality assets, we're looking for good value. Historically, we have taken action when we thought it was in the interest of our shareholders. I'm not worried about the selling shareholders. I'm worried in what it does for us. It has to be an attractive use of capital. We translate that into book metrics and earnings accretion, free cash flow accretion. We have said pure plays are just a little more difficult because it's harder to get the synergies. How do you pay for a premium? Could there be no premium or low premium deals? Yes, we haven't yet seen that, but maybe that's coming. So there's a bunch of questions out there. But I think it's fair to say M&A, it seems to make sense in the sector where you have equities values pretty beaten up, including ours, but on a relative basis, we've held up better. But there's still a lot of hurdles to jump over because you need quality assets, you need synergies, you got to pay for some premium, you got to have the cultural fit, all that. There's not a lot of that out of there. But every once in a while, Unocal or Anadarko, at least for us to sign the deal before we walked away. Every once in a while, you'll see something that we see could make sense for our shareholders.

Right. Stepping back to the Permian again here and the growth targets laid out back in March. 1.2 million barrels a day long-term plateau, $4 billion to $5 billion of CapEx to do it. One of your peers, with respect to their Permian targets, they have not necessarily walked away, they maybe just deferred the timing a little bit with the view that, that could still certainly happen. So where do you stand on that in terms of cash flow versus growth and whether those targets you laid out in the current scenario makes sense to still maintain?

Okay. There's a lot there. I guess I would say they weren't targets, first of all. We were trying to answer a question was around decline curves, right? At the time, we were going in the Investor Day, there were questions around the fast declines in the Permian. We wanted to say that, no, you can steadily grow this at a steady investment level, and then you can plateau it. And given our position, at least in the acreage we have and the opportunities in the queue, you could extend it for a long time, and it's a free cash flow machine. It was going to be free cash flow positive this year. Stay for -- grow in ensuing years and stay there. We are not focused on growth. I think if there's a change that comes out of this, I think it was changing pre-crisis. I mean, first of all, we've never -- we're a dividend, value stock, income paying stock. That's obviously why we showed a 2-year stress test at $30, why it's so important for us to maintain the dividend and then sustain and grow it over time. So we are not -- we don't attract growth investors. And I don't think the sector does either. And I think that's been borne out. And now E&Ps and others are adjusting to that. Now we need to grow long-term value to obviously pay a growing dividend over time. The value in the Permian is there. So I would agree that it is just deferred, but the ability for us to still get to that plateau absolutely exists. We are shifting the curve to the right because we're going to exit this year 20% lower than we said just earlier in March. But if the price signals are there, I mean, it's the beauty of the Permian, it's highly accretive to cash flow returns, it's got all the right metrics, and it's very flexible. And so you don't have to be locked in. We don't have to invest billions of dollars and bring on production at $30. We can wait, and we can invest that capital when we think we're more likely to get $50, let's say. So that's flexible. So yes, the resource is in the ground, we're shifting out the curve. We don't know, 1 year, 2 years, it's just -- it's uncertain. But when we see demand come back, I think, in a more ratable, gradual way, we never -- we got criticized we're going too slow in the Permian. Now we're getting criticized because we're still going the same speed because everyone else was slowing down. We kept a steady investment, very deliberate investment plan in the Permian. And when the price signals are there and with the right fundamentals, we can go right back to that path.

Yes. Let's shift gears to the Tengiz project for a second. You gave an update that this year's capital might actually come in lower, then there's also some risks around COVID and things like that. So can you give us the latest status update what's happening in Tengiz? And what do you think is the base case for when the FGP project should be coming online at this point?

Yes. We haven't given updated guidance. We updated the schedule and the costs last year. We had really good momentum. I mean, that was after a full rigorous cost and schedule assessment, which is a very detailed disciplined process where you look at everything. We had a very good stretch fourth quarter into first quarter. And then, as you say, we've had some cases at the field. Now -- but in Korea, where the modules are being fabricated, that actually worked throughout the whole crisis. They're on schedule. We're down to just a handful of remaining modules that we expect to come back this month. And that means everything will be on its way to Kazakhstan. So then the real question is the productivity at the site. So we have demobilized 15,000 or 20,000 workers on the project. They were working on noncritical path activity, so we have kept the workers who are working on critical path, but we reduced essentially the concentration of workers there so they could be safer. And it depends on when they come back. And so if they come back before the work -- if it's still noncritical path, then, in theory, we could hold the schedule. If it takes longer, it'll take longer. So the savings on capital, some of that's because we've deferred. Obviously, that work is not being done, and we've deferred it about half. But some of it is true. We were more productive in the first part of the year. We also have currency effects. So there's a lot of local currency Tengiz expenditures, and the Tengiz weakened versus the dollar, so those are savings. So we'll update when we can. It's still too uncertain. What we said is there's some -- we expect some degree of impact. And it's just not, we just can't guide on it at this point in time. It really depends on when we know -- when we can remobilize the workers and when we know whether that work is still not on critical path or if it becomes a new critical path, which means obviously the schedule moves out some.

Yes. I probably have time for one last question here. I wanted to focus on chemicals for a minute. There has been some reports of CPChem's interest in the Sasol Lake Charles facility. And obviously, you also have these potential JV projects still out there from an organic standpoint. So maybe you can just talk broadly about the strategic value of inorganic opportunities within CPChem as well as where you personally kind of stand on the idea of spending capital to grow organically at CPChem right now.

Yes. Well, look, I won't comment on those reports. But, I mean, I guess, it's an M&A question. I mean you can buy capacity or you can build capacity. And just like you can develop your own reserves or you can buy reserves. So I wouldn't think of it any different than that. We like petchem. We're cautious on it because although demand is -- has held up better through the crisis and is doing well, we also -- there's a lot of supply. But that's fundamentally how we think about any kind of build or buy. If there's a potential acquisition that's lower cost and how you would construct it or develop the resource yourself, that's something we have to look at. That goes to your earlier M&A question. This is just another version of it.

Okay. I think that's all the time we have. Pretty quick 30-minute session here. But Pierre, thanks so much for, again, attending the conference. And I look forward to the ESG fireside chat tomorrow.

All right. Thanks, Phil. Thanks for your questions.