Chevron Corporation (CVX) Earnings Call Transcript & Summary

Good afternoon, and welcome to the ongoing 37th Annual Strategic Decisions Conference hosted by Bernstein. I am Bob Brackett, Bernstein's E&P analyst. I'll be hosting Chevron, and today, we have the CEO of Chevron, Mike Wirth with us. The way this session will run is as follows: Mike has a few slides he's going to walk through, then we're going to adjourn to a virtual fireside chat. Ultimately, this is your conversation and the way that you can contribute to that conversation is via the Q&A button on the right side of your screen, which takes you to Pigeonhole. We have a handful of questions in there already. You can either add questions. You can vote up the questions that are in there. And that will determine where our conversation goes. However, in terms of structuring that conversation, we'll follow a bit of a pyramid principle. We'll start. We'll get a view for Mike on things like the macro outlook, the down cycle we've just been through, we'll transition to talk about lowering carbon and then return to the traditional integrated portfolio. With that -- keep in mind, we have about 45 minutes, and with that, I will turn it over to Mike for some slides and some introductory comments.

All right. Well, thank you, Bob. It's a real pleasure to join you here today, and I'm looking forward to the opportunity to do these things in person again. I'll start out with just some real quick comments here. First of all, before we begin, I'm going to share 3 or 4 slides here, and some of them will contain estimates, projections and other forward-looking statements. So in light of the risks, uncertainties and other factors that those entail, please take a moment to review the safe harbor statement that is on the screen. And let me move on to the next slide here, which is really a simple way that we try to level set with people on beliefs. And we have a set of core beliefs. First set enabling human progress is underpinned by affordable, reliable and ever-cleaner energy, that we need to do that all while protecting the environment. We believe everyone is entitled to a clean environment, and we all will play a part in addressing the risk of climate change. We clearly believe that the future of energy is lower carbon, and we intend to be a part of that future by making our operation less carbon intensive, not relying on just shuffling of assets around our portfolio to shift production to less-efficient operators when that really doesn't do anything to help the environment. We support a price on carbon and are working toward a net zero future, which has really made possible through the third message here, which is innovation and technology. We believe and we've lived to the experience of people working together to meet society's ever changing needs. In this instance, no one company, no one industry, no one country will develop a solution to this dual challenge of meeting a growing demand for energy in a growing and developing world and also addressing the risk of climate change. And you can expect Chevron to play a leading role in helping to solve these challenges. And so these are beliefs that are really core to our success, which leads to the next slide, where it's a quick overview of our value proposition. 3 words that I use to try to describe our DNA is consistent, prepared and adaptive. There are 3 characteristics that have helped Chevron succeed in the past and will be a key to our success in the future, consistent values because the world changes, but our foundation doesn't. Investors know what to expect from us. Staying prepared because we're in a cyclical business. We've navigated this recent cycle, better than most in our industry. And adaptive because we live in a dynamic world, and we need to adapt along with that world. And moving to the next slide, which I think is our last one. Our objective is very simple. It's to deliver higher returns and lower carbon. We expect to improve returns by more than doubling our return on capital employed by 2025 at flat nominal oil prices, so no help from commodity markets, all while focusing on lowering our carbon intensity through investing over $3 billion in 3 specific action areas, lowering our own carbon intensity cost efficiently, increasing renewables and offsets in support of our business, and investing in low-carbon technologies. All of this is made possible through downside resilience that is enabled by our industry-leading balance sheet. And then upside leverage, which provides strong excess cash flow and the capacity to return cash to shareholders if we are in a commodity market that is one that looks like we're in today. So we think we're in a different place than others in our industry, a company that's been consistent, prepared and adaptive and one that is clearly focused on those 2 simple phrases, higher returns and lower carbon. So with that, Bob, I'll turn it back over to you for the fireside chat, but I thought it'd be a good way to just frame up some things for people that might not be familiar with our company.

Fantastic. And there's a couple of things you mentioned that I'll jazz off of later on. We'll start with a couple of macro questions. One is, earlier today, Olivier Le Peuch, Schlumberger's CEO, mentioned the potential super cycle. Do you agree with him? Where do you think we are in the overall oil and gas cycle?

Yes. I didn't hear Olivier's comments, so I don't know the context. But you do hear people talking about commodity super cycle that perhaps they see early signs of. There is enough unevenness in the state of things around the global economy that a kind of synchronous demand hole that could create a commodity super cycle. Still doesn't appear to be underway, I would say. And so while certainly some signs of inflationary pressure in certain commodities and supply chains that are constrained, I wouldn't -- I don't think that, that's the current outlook for a super cycle. I would say we're seeing good signs of recovery in markets. Demand is coming back. Economies are recovering, particularly where the virus is now coming under control through vaccines. Other places, which are still struggling with it, are further behind in that trajectory. But broadly, it feels like the world is pulling through this now. Crude inventories are coming down. Demand for products is going up. The Memorial Day weekend was a huge travel weekend with airports full again now. Overall, aviation is still the weakest part of our business. And it's really international travel, which has not returned in any significant way. The 2 biggest domestic markets on the planet, China and the U.S. are back to levels pretty much that they were prior to the pandemic. Gasoline and diesel are at or even a little above where they were before. So overall, I would say the signs point towards markets returning toward balance, and I think that's good for the economy broadly.

It's funny in a sense there's a parallel between how the developed world has had access to vaccinations and therefore, a faster recovery versus the developing world, that almost mirrors the arguments we have around the importance of energy. And the developed world has said, "Okay, that's good. We've used our energy. Now let's try to reduce it where the developing worlds will wait a minute." There's a lot of things we would like to do with cheap affordable energy.

Right.

The -- you alluded to it, and we've had questions on it as well. Is inflation good, bad or a pass-through for a Chevron investor?

The degree and exactly how it manifests itself could shade this a little bit. But inflation really over the course of our company's history is not a new phenomenon. Generally speaking, our revenues benefit from an inflationary cycle as commodities and prices reflect that. We're not seeing signs of real broad-based cost pressure in our business. Request for price changes remain very low. There are some specific areas that we're seeing some signs of steel that's used in tubulars in our business has been strong. Hiring truck drivers is very difficult right now. So there can be isolated areas that we're seeing a little bit of pressure. But it's a mixed story. I think inflation generally signals there's economic growth and demand underway, but it also presents challenges on the cost side, which always matters. So I think we're prepared to deal with it. You hear lots of different opinions about how strong and how long this period of inflation will be once we get past the kind of year-on-year comparisons with the worst of the pandemic. And so we'll remain watchful, but I don't think it's a big deal either way for our investors.

And in talking about the comparables, we're lapping a time of negative oil, a time of unprecedented demand destruction. In the down cycle, can you talk about some of the major decisions you made and which ones were impacted or accelerated by the pandemic? What did you respond to that you're proud of? What were other things that were long way of length and were going to happen anyway?

Yes. So I already mentioned this kind of -- these trade words of consistent, prepared and adaptive. We really were prepared. We had a pandemic response plan on the shelf by the end of February last year. We actually had about 50 pandemic response teams activated around the world. We prepared this after SARS and MERS and Zika. And so we drilled and practiced for it. So we actually were able to work quickly on keeping people as safe and healthy as we could. There were some -- I think you said longer wavelength things was the term you used. We had already identified the need to become even more efficient in our operations. So we had cost reduction and restructuring efforts that were initiated pre COVID. We saw those through, even as we went through the pandemic. It was hard, given what people were experiencing. But it needed to be done whether or not we went through what we went through last year. There were some things. I think if you look at -- things that were accelerated. I think, in our industry, and I know for the investors that are tuned in today, this is a sector that has not been in favor. And frankly, portfolio managers who have been light on energy, I think have done better over this past few years for being there. This is an industry that needs capital discipline. It needs to not chase value out of deals. And it's got to focus on returns on invested capital and returns to shareholders. We've been focused on that for quite some time. I think the pandemic has accelerated the sector recognition of that. And we've tried to lead. We did an acquisition last year that was driven by the pandemic or the opportunity was created as we saw a company that was at a relatively low valuation historically in an environment where a low premium deal was a feasible opportunity. So we acquired a company called Noble Energy. We're very happy with that deal. It's one where we've doubled the synergies that we first saw. We closed it quickly, quality assets, a fair price. And so I think we did have some things that we were committed to, some things that were accelerated and then that's a real opportunity that we capture, and I think we'll be pleased. Time will tell ultimately on M&A, how it plays out. But right now, we feel like it's been derisked and it looks pretty good.

We have a follow-on question from an investor on that topic, which is at $78 Brent, are there still transformational M&A opportunities out there for Chevron or more bolt-ons? If so, what geographies are the most attractive?

Yes. I do think there were some companies under real distress last year during the depths of things. And at higher prices, certainly, energy has performed well relative to other sectors. So valuations are not nearly what they were a year ago. And I think that does diminish the likelihood we wouldn't do anything. But look, we've got a very disciplined process. We've got well over 1,000 companies that we continually monitor. We've got a series of strategic filters and screens we run those through. And we look at really -- we want to strengthen our overall portfolio, if we were to do a deal. And a pure-play Permian play, we've already got a really large Permian position. And we're working to make it better by doing kind of small off the radar transactions all the time to core up our position there. But we would be more drawn towards a diversified asset base. Noble Energy had a strong position in the Middle East, strong position in Colorado. And there are companies out there that might have assets that fit nicely with our operating capabilities and our footprint. So we're going to look for value, we're going to look to not overpay, and we would look for something that strengthens our portfolio and frankly, competes for capital. So we stay very disciplined on capital. And if we bring something in that we're not going to fund because it will compete for capital in our portfolio then we shouldn't bring it in.

And you mentioned, of course, Noble Energy being a low or no premium deal, which was true at the time. However, that was after an extremely high beta move down to a company, an independent like a Noble relative to a more modest fall for large integrated. So arguably, this time around, those little independents have a nice headwind and might be tougher to do a sort of no premium deal. And I can't help go back to the concept that you had a SARS-based, but COVID-19 response plan on the shelf, so -- in February. So you could have gone long toilet paper before the rest of us have even contemplated that. What other long -- I'm curious, what else is on that shelf? What other long-term contingencies have you all planned for?

Oh, we've got a variety of things. I mean you look at the risks that we face in our business. And you don't want to find yourself where a risk manifests itself and you're flat footed. You want to thought it through ahead of time. So I mean, I'll give you one example, and it's a very timely one, given recent events, cybersecurity. We do multiple drills a year in various parts of the world in our portfolio of a cybersecurity incident. And we use it to test our ability to detect, to respond, to mitigate and then to make decisions around it. And so that's one example. There are other types of incidents. You could imagine, security incidents, operating incidents, expropriation types of things that we have to think through ahead of time. And so we have a very comprehensive approach to planning for crises and drilling for those so that we've got at least a framework. You can't -- everything has its own specific set of circumstances. But understanding the decision-making hierarchy, the resources that would be engaged, some of the critical issues that you would deal with really helps in the first hours when sometimes decisions must be made pretty quickly that you're not missing something big, because you thought through it when you've got the luxury of a little bit of time to do the drill and then do a look back and sharpen up your plans.

And there's a nice transition there to sustainability for our in industry, which is the energy transition, that's ultimately planning for almost an existential threat over a multi, multi, multi-decade horizon. So how do you at Chevron define the energy transition? How do you plan for it?

Yes. So one thing I try to remind people is the energy system has actually always been in transition. And if you go back to before oil, going back to middle 1800s, it was biomass. And actually, when oil came into the system, it was primarily used as a source of lighting for lamp oil and it displaced whale oil, which was used at the time for lighting and kerosene was a higher quality, less smoky and more affordable way to illuminate with lamps. And it also took the ecological pressure off of wales, which were being hunted into near extinction at the time. And you can roll forward through a whole series of things in our industry. So as the energy system has grown, the world economy has grown, nuclear has come in. And natural gas has come and hydro. And now wind and solar, and we're talking about hydrogen and other things. So the energy system has always been in transition, and it's been growing. We -- in the current context, we support the Paris Agreement. We absolutely believe and intend for the future of energy to be lower carbon. We're pursuing a variety of new fuels, hydrogen, carbon capture and storage. We take a bit of a different approach than some in that we focus on areas where we think our core strengths will allow us to contribute in ways that are perhaps unique and not as broadly applicable. So things like wind and solar, we really haven't gone into merchant wind and solar, some other companies in our industry have. It's a pretty crowded space. There's no shortage of capital that's available. The returns are known, and they're kind of single-digit returns. And frankly, we think our investors can identify and diversify into that if they want that exposure, and they can do that more effectively than if we were to insert ourselves in and try to do that for them. So we're working on lowering our own carbon intensity of our operations, increasing renewables and offsets. So things like renewable natural gas, renewable diesel, sustainable aviation fuel and helping our customers to decarbonize their business, which they're all working on. And then the third is investing in low-carbon technologies. So we've long had a venture capital arm in the company. This is investing now in everything from carbon capture and storage to novel geothermal, nuclear, some hydrogen things. And so these are technologies and entrepreneurs who have an idea that we find interesting enough that we want to put some support behind it and hope that it will scale, costs will come down, economics will improve and technologies where we think we would have unique technical operating project management and financial skills that would help us scale these things up in a way that takes advantage of some of our unique capabilities as opposed to trying to move into an area where we don't have demonstrated strengths, such as solar and wind.

One of my truisms has always been strategy isn't what you say yes to. Strategy is what you say no to. And so I hear you on wind and solar, are there other aspects of the energy transition, you'll say no to?

Wind and solar are the ones that have got a lot of momentum right now that we have had -- people bring us opportunities quite often. And we just haven't seen that we're going to create value for our shareholders in doing that. I'm reluctant to rule out other things that are early -- because wind and solar are pretty well established. There's a lot of enthusiasm around hydrogen, but there's a lot of challenges with hydrogen. Most forward scenarios show a big role for carbon capture and storage, but they are technical and policy actions that have to occur. Modular nuclear, we've invested in this company that has a fusion technology, which has long been the holy grail. And so we're not ruling out some of these things because they're so early that we want to be exposed to ideas that may be coming into their prime that historically have never gotten much traction. So it's in these more mature areas where we just see we don't add value that we've really decided to roll some things out.

It's funny. The 2 things that have all been doing in oil and gas for a quarter century. Fusion is almost 11 years out and then Alaska gas pipeline is almost 11 years out. And that's just slid for most of the quarters. I'm trying...

I mean it's to know somebody who would say about oil shale, not the kind that we're producing now. It's 20 years away, and it always will be.

Yes, I almost moved to Rifle, Colorado in the heyday of oil shale, but that's a different story. If we come back to the topic of carbon, 2 questions that are somewhat related. The first is how do you avoid clashing with activists in the way it seems like Exxon has in spite of your common sense approach to carbon? And then a similar one is, can you address the shareholder vote last week on emissions and any read across from news flow on Shell and ExxonMobil?

Yes. So how do you avoid activist clashes? Look, we try to engage with shareholders on a year-round basis. And it's not just a proxy season thing where you've got something on the ballot. Doing conferences like this, doing nondeal roadshows, I spend a lot of my time listening to our investors who have lots of different ideas. And we sit down to try to explain how we think about things, where the company is positioned, what our priorities are. But then also ask for feedback and to hear what other people think. And so I think what I find, even as I deal with, which you would argue, so you might call some of the more activist investors, we have not in the activism since, but kind of environmentally progressive pushing. We have a lot more common ground than we do have differences. And I remind our people, just because we don't agree on everything, doesn't mean we can't agree on anything. And so we see common ground. We seek to understand. And sometimes, these are a matter of framing, in time, in technology progress. And we often find through the dialogue that we share a lot more and a desire to work together. And look, these -- I said earlier that these can't be solved by any one company or any one industry. We need to partner with conventional and unconventional partners to try to find a way to advance solutions here. And so engagement for us is the key. And it doesn't mean that everybody always walks away, feeling like, "Hey, we were 100% aligned." But we ought to understand one another. We ought to be willing to be honest about where we see things differently and why and commit to considering that discussion because we all learn and can move forward, I think, better when we understand that. In terms of reaction to last week, the kind of concatenation of things on 1 day. You had the court decision in the Netherlands. We had a shareholder proposal. Exxon had their vote. It's just people care about this issue, and we get it. And I wasn't surprised because I know people care about it, and I know our investors care about it. Because I hear it from them every day. On the ballot -- or the proposal on our ballot that got a lot of support on scope 3 emission targets, we're in the process now of considering what will we do. We'll have some dialogue with the Board about this. The point that I think is really important to understand. A lot of people that are not close to this issue, scope 1, 2 and 3, it all starts to sound like just a bunch of technical talk. But scope 3 emissions are from the use of our products. It's what our customers emit as they use our products. And it's really driven by demand. And so a company in our industry and some other companies have already said, we are going to reduce our production of oil and gas into the future. And so their company will see their scope 3 emissions come down as they do that. It doesn't mean the world's scope 3 emissions change at all. In fact, if that demand is now met by producer who's less responsible, who's less committed to reducing the carbon intensity of the current energy system, it actually -- you could see more emissions rather than less. And so there's a difference between making a company's emissions footprint lighter and kind of greening the company. And really helping the whole earth achieve some of these reductions in this progress. So we're in the top quartile in terms of having the lowest carbon intensity for our oil and gas production. We're one of the best in the world, well below the industry average and way, way, way better than the third and fourth quartile producers. And so the question really becomes, as the world will use more energy in the future, and will use more oil and gas in the future, which virtually every credible forecast would suggest as you said, there are still decades and decades of this demand that will need to be met. If you take the most efficient and the most -- the lowest carbon intensity production out of the system, should more of demand or less be met by the people with the lowest carbon intensity. And my argument would be you should want the best producers to be meeting the most demand that they can. So it's not the dirtiest producer, but it's actually the one who's on the best trajectory. And so that was really the basis for our not supporting the proposals. We think it actually doesn't help the planet necessarily. But we've got a -- look, enough of our shareholders, said they wanted to see something happen here that we've got to really sit down and look at all the different alternatives, lots of people have made some declarations in this space. And we'll be evaluating how we think we can best respond. And we try to have what we call an honest conversation about this. And it's not denying anything. It's just trying to ask these questions as the ones I just posed. So we're really genuine about being part of this solution, people understand where the trade-offs are, where the costs are.

Yes. I mean, it's demonstrable. Even today, there's news flow around a European major disposing of assets to a local producer in Southeast Asia. And suddenly, the question is, well, who's going to shine a bright light on those businesses, emission standards. And it's almost we're seeing this long-term pattern in the U.S. of decriminalization of marijuana, right? Arguably, you want to take something and move it, shine a bright light on it, regulate it and have the best, most-efficient folks operated or the equivalent. So we've always found, certainly from our side, having those conversations. You want the best operator, right? If you can't change scope 3, and if I combust a molecule of methane, I know how much CO2, I can't control that unless I capture that molecule. The only thing I can control are sort of the scope 1 and 2. So that resonates with me. One of the ways you talk about reducing your carbon intensity is this 35% reduction in carbon intensity. And your mechanism, which is great, one is a cost curve, a marginal abatement cost curve, where you can look and say, there's sort of 3 types of projects. There are things I can do that are win wins. I can reduce CO2 and generate a positive NPV. There are things that are kind of a push, right? I'll do them. Maybe it costs me a little bit, but certainly less than the cost of carbon. And then there are just things and I'm thinking almost direct air capture way out on the cost curve that you look at and say, the world is going to have to pay a massive price for. The $3 billion or $2 billion that you talk about investing, how do you deploy that across that cost curve?

So the concept you described is exactly what we do, which is for every asset and every operation in our portfolio, we've done the technical work to understand what are the carbon -- the greenhouse gas emissions, and then what are the technologies that exist or that we hope exist that would reduce those emissions. What are the costs? And some of these things actually bring with them benefits, right? There's energy efficiency. It may change your maintenance profile, some of the renewable power things can help us be more cost efficient. And so the first things that we're funding are those that actually have a payout. And they have a business case that -- this is a good thing to do just in terms of running the business more efficiently. And there's a fair amount of that, that historically, have been identified, but it had to compete with other capital investments that would bring other justification with them. And until we started to centrally allocate capital for greenhouse gas reduction, business units, in a more decentralized model we use, tended to choose the other projects and keep these kind of on the list for the future, but they kind of always were on the list, they were never coming forward. So we've centralized that capital allocation, said we will spend this money on these kinds of things. And so we can get after those in the order that makes good sense for our shareholders, good benefit for the climate. There's another tranche of things that are a little further out. This would be outside of that $3 billion, where we know what it will take, but the economics on these are negative. And so without either technology development or policy change that creates a price signal. These would destroy shareholder value, not be neutral or accretive. And so those are in the queue here. But what we're really doing is looking for technology and/or policy to help shift the economic equation on those. And then there are -- there's a kind of the stub that's really hard to do that because the technologies may not exist yet today. And so that's where you ultimately think, you're going to have offsets. You're going to have to have carbon capture and storage. Because you really don't have a technology that will work on these things. So we've lined it all out. So we've described what we believe is the pathway to getting to net zero on our scope 1 and scope 2 emissions and recognizing that as you get deeper into that, the costs go up and the technical challenges get harder. It's not a reason to turn away from it. Both of those things, I fully expect will improve over time. But you want to work, start on the things that can actually make an impact on today.

And where does policy fit into that? My history is that if you give an engineer a clear target and a price signal, they will go find clever things to do. Are tax credits a good enough price signal? Is a carbon -- a global carbon price the right signal? What's best to deploy capital with certainty?