Chevron Corporation (CVX) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the Chevron Exchange Q&A series. My name is Jeanine Wai. I'm the Senior U.S. Integrated oil and E&P research analyst for Barclays. I'm very happy to be joined by Mark Nelson, Vice Chairman, for today's conversation. In addition to his corporate responsibilities, Mark leads Chevron's strategy and sustainability, corporate affairs and corporate business development. With more than 35 years of experience, Mark has served a number of leadership positions with increasing responsibilities within the company such as in retail, marketing, operations and business planning. During this event, we will discuss some of the top-voted questions from Chevron's retail shareholders, focused on Chevron's strategy, business and financial performance. Now before we get started, I'll turn it over to Mark for some opening remarks.

Thanks, Jeanine. Jeff Gustavson was originally going to join this session, but he wasn't able to be with us today for personal reasons, but he looks forward to hosting a future session with you all. I'm happy to hear from our retail investors today and learn what's on the top of each of your minds. We value your investment in Chevron. And at Chevron, we believe we have unique capabilities. We have well-positioned assets and long-standing customer relationships to safely deliver higher returns and lower carbon. With our differentiated value proposition, it's an exciting time to be a Chevron shareholder. And I look forward to answering your questions.

All right. Thanks, Mark. This is going to be fun and informative and I'm personally very excited to hear your thoughts on these important questions. So let's jump right in. Okay. Let's set the stage by talking about Chevron's role in the context of what's going on globally. On one hand, we have the energy transition and moving towards a lower carbon intensity future. Now this will rely on a host of new energy sources and the process it will take some time. And on the other hand, we also have the current energy needs of the world, which rely pretty heavily on traditional oil and gas and the warning crane really highlights just how tight supply/demand is. So where does Chevron fit in? Patrick P asks, does Chevron see itself as an energy company or as an oil company?

Patrick, thank you for the question. We view ourselves as an energy company. Across the globe, we produce crude oil and natural gas. We manufacture transportation fuels, lubricants, petrochemicals and additives, and we've developed technologies that enhance our business and the industry. Our strategy is to leverage our strengths to deliver lower carbon energy to a growing world. Our objective is to deliver higher returns, lower carbon and superior shareholder value in any business environment. This means we focus on the areas where we have a competitive advantage to make disciplined investments in high-quality assets. We're growing our traditional oil and gas business. We're lowering the carbon intensity of our operations, and we're growing new lower carbon businesses in renewable fuels, hydrogen, carbon capture offsets and other emerging technologies. As an energy company, we believe it should be affordable, reliable and ever cleaner. We're meeting the energy demands of today while building the lower carbon energy system of tomorrow.

Okay. Great. Let's talk about building the energy system for tomorrow. Now moving maybe to the regulatory front right here in the U.S. How are we, as a country, are going to navigate this transition process? There's a lot of moving pieces to that. So for example, the Inflation Reduction Act that comes to mind, it includes things like subsidies and tax credits for renewables and things like carbon capture. However, there's also been some proposals, but none passed for things such as windfall taxes on the oil and gas industry and phasing out gasoline and diesel engines. So oil and gas has at times really felt like it's been in the crosshairs with the current administration. So Mark B asks, President Biden has repeatedly denounced the oil industry. What is your future outlook with respect to the government's plans to terminate your product?

Well, thank you, Mark, for the question. I think you're asking a question about politics and forecasting altogether there. With that in mind, we've attempted to remain very pragmatic and consistent. We believe that conversations about the energy system must balance economic prosperity, energy security and environmental protection. Affordable energy is vital for economies to flourish. Reliable energy is essential for national security, and we all have a stake in the lower carbon future. When decision-makers over-index on any one of these, there's a significant risk for unintended consequences. Chevron has remained consistent. We believe that energy should be affordable, reliable and ever cleaner. The reality is the demand for our products is going to be needed for decades and decades to come. Our products are essential for modern life. The energy system today is 80% -- roughly 80% fossil fuels. It took 40 years for oil to grow from 1% to 10% of the world's energy mix. I think that puts in perspective that sometimes we forget the energy system is very, very large. It would take over 110 billion industrial solar panels to power the world for 1 year. And I think that would cover all of the United States, east of the Mississippi and include Texas and California. So a very, very big energy system. We're focused on growing a lower carbon intensity traditional oil and gas business to meet the demand today and well into the future.

Okay, Mark. Let's keep it on the same high level before getting into some Chevron-specific questions and let's hit a few macro topics. So given the calls for decarbonization, there's naturally a lot of questions around the future of oil and gas supply and demand. Now Chevron, you're involved with both traditional and new energy businesses. So what do you think? [ Ahmed N ] and John C ask, is there going to be an increase in production of oil and gas in the future?

[ Ahmed ] and John, thank you for the question. For us, production growth is actually an outcome. It's an outcome of driving returns from capital-efficient investments in what we believe is a very advantaged portfolio. Said another way, it's value over volume. That said, over the last 5 years, we have been the most capital-efficient company amongst our peers. That means we get more for every dollar we invest. And we've had record U.S. production last year, and we plan to grow overall production at a 3% compound annual growth rate by 2027. So we are growing. And we've got multiple assets from which we can grow. Let's start with the Permian. We expect the Permian to add over 450,000 barrels of oil equivalent per day over the next 5 years. In 2025, we expect to hit 1 million barrels of oil equivalent per day and then plateau at greater than 1.2 million later this decade. And we have decades and decades of inventory in the Permian. Another growth asset would be Tengiz, a project we have in Kazakhstan. We've been in Kazakhstan for 3 decades, and we've been investing in a large project there for about the past 6 years. We expect an additional 130,000 barrels of oil equivalent production mid-decade to put us upwards of 1 million barrels of oil equivalent per day in 2025. We also have the Gulf of Mexico, an excellent portfolio of projects. We have a sequence of projects. And sometimes, you might laugh at the names we come up with for these projects, but we have a project called Mad Dog 2 that will come online this year. And then we have a project called Anchor, and a project called Whale that will come on next year. And then a project called Ballymore in 2025. That's 3 years of multiple projects coming online. And we, therefore, expect to grow our production there 300,000 barrels a day of oil equivalent in 2026. And then finally, the Permian is not our only shale and tight asset. We have other shale and tight in our portfolio. And we expect around 200,000 barrels a day of oil equivalent growth by 2027 from those assets. That growth is primarily driven by assets in Argentina, Colorado, an area we call the DJ Basin. We've added a rig in Haynesville in East Texas, and they were holding steady in Kaybob Duvernay in Canada. In addition to those growth assets, it's important to note that we have very shallow decline in our base portfolio, largely because those assets are facility limited, not field or geology Limited. So we have a lot of growth ahead of us, but it's always value over volume for us.

Okay. Clearly, a lot going on there. Maybe we could start by focusing on oil production only and what's going on here in the U.S. So the Permian Basin in Texas and New Mexico is the growth engine of the country. However, as with all oil, there's only a finite amount of rock and resources. And some may argue that given the maturation of U.S. shale that we're in the later innings of oil growth in the Permian. So Chevron has the most attractive position, the most attractive position we'd probably say, out of all of the energy companies. And really, you have very deep expertise there. So Mark, can you weigh in on where the industry is going with the Permian? Leroy S asks, can we expect Permian peak oil? Are there any technological improvements for enhanced oil recovery?

Thank you, Leroy. We have people that love this question because of what we do every day. In fact, at our Investor Day, we announced that we'll exceed our 3% compound annual growth rate by 2027. We have significant confidence in our growth activity. And a large portion of that growth is driven by the Permian, where as I mentioned earlier, we'll grow over 450,000 barrels of oil equivalent per day. But in the Permian, we remain returns and values focused, and production, of course, is an outcome of those decisions. And so given the growth I described, that means we have a very, very strong portfolio. From the Permian, just to reinforce, we expect 1 million barrels a day by 2025 and over 1.2 million barrels a day of oil equivalent plateauing later in the decade. Although I mentioned plateau, I do want to remind everybody that we are the largest resource holder in the Permian and have roughly 100 -- I'm going to say that again, 100 years' worth of 2022 level production resources. That's large acreage, big inventory, flexibility and opportunities to continue to learn and improve. This is more than just the Permian. We've also done over 100 pilots across the Permian, Colorado and Canadian shale and tight businesses that show promise. These are technology solutions and innovation that are critical to growing returns in this particular production area. It's important to remember that production recovery rates, especially in the shale and tight assets, are in the high single digits today. That means we're leaving 90% of the molecules behind. And we're using things like fiber optics and new fluids to increase that recovery. So I do believe there's even more potential in the Permian. That's an exciting future.

Okay. We're going to stay tuned to that, Mark. If we could, let's switch from the macro to the micro and dig into some Chevron-specific questions about financials and performance. Starting with the financial side. We know that Chevron has 4 financial priorities and the dividend certainly at the top of the list. We think the dividend is a really important part of Chevron's investment thesis and a lot people rely on them. I mean who doesn't like getting those dividend checks in the mail, but stepping back here, Chevron does have multiple options for what you do with your free cash flow. So can you help us really just understand your capital allocation process? Patrick M asks, dividends are great and all, but why not use that money and reinvest in the company and make our shares jump higher?

Thank you, Patrick. Quite frankly, Chevron is doing it all. Chevron, as Jeanine mentioned, has a long-standing set of financial priorities that guide our actions, and they are in order. First, it is to maintain and grow the dividend. We've been very clear that the dividend is our #1 financial priority. When we increased the dividend, which we've done each year for the past 36 years, we view it as an obligation into perpetuity. Our investors rely on us to deliver a dividend for income. We've had 6% annual dividend growth over the last 15 years, and our 5-year dividend growth is double our closest peer. What gives us confidence in that dividend as well as in delivering on our other financial priorities, is that in our plan, we see greater than 10% per year free cash flow growth that supports this plan going forward. So our second financial priority is to fund our capital program, which I think is what you were asking about. We need to reinvest in the business to support the growing dividend. We can't grow the dividend in perpetuity on the back of a shrinking business. Our 2023 organic CapEx is up over 30% versus 2022. And remember, that's on top of our leading capital efficiency. Our third financial priority, again, in order, is to maintain a strong balance sheet. As you all know, we operate in a business that is cyclical. Commodity prices can go up and they can go down. Our net debt ratio was just over 3% at the end of 2022, and we had the lowest net debt ratio of any of our peers. During COVID, we were the only company to show a 2-year stress test at $30 Brent, $30 per barrel, where we could fund the dividend and CapEx even at a very low commodity price. And finally, our fourth financial priority, return surplus cash through share buybacks. Our current guidance is $10 billion to $20 billion per year of share buybacks, and we'll start buying back shares at a $17.5 billion run rate in the second quarter. We'll buy back shares across the cycle, and we have a track record to prove just that. Over the past nearly 2 decades, we bought back over $65 billion in shares below the market average price over that same time period. Again, we're doing it all. We're delivering on all 4 of these financial priorities and growing energy supplies.

That certainly is a pretty impressive track record there. Maybe in terms of protecting the excess free cash flow that could be used for those dividends or from reinvestment into the business, we know all too well that the oil and gas business is cyclical. So CEO, Mike Wirth, he's frequently commented that Chevron isn't procyclical, it isn't countercyclical, but instead wants to operate across the cycle so that shareholders, they see that consistency and they know they can count on that. Now the oil industry in Chevron, you all had a record year in 2022. And now we're seeing some weakness in oil and gas pricing, and that's related to a couple of things, including recession concerns. So Renee K asked a question that I think is on a lot of people's minds, which is last year, the reopening of the world, it led to higher earnings. As shareholders who are seeing price decreases now after a large run-up, what is Chevron really doing to hedge against future price drops?

This is on the top of a lot of people's minds. And you may have heard us in the past talk about building and running business that can win in all environments. And that's because we are accustomed to volatility. The volatility you referenced isn't impacting our plans today at all because we developed our plan with many scenarios in mind. Our objective is the same: deliver higher returns and lower carbon. We develop our plans based on a view of long-term fundamentals rather than short-term price fluctuations. It's looking way out the front part of the window of the car rather than what we're going by today out the side window. We tested our 5-year plan against oil prices with a downside of $60 Brent average and an upside of $85 Brent average. So we're trying to make sure we're positioned for any environment. There are a lot of macro uncertainties, as you mentioned right now, especially on the demand side. The question of -- from an economic standpoint, are things slowing down? Or is it going to be a mild recession? How severe is the banking issue? And how does it impact consumption of our products? There's also the China impact post-COVID or post the COVID restrictions will demand just accelerate upward? Or will it be a bit more up and down and jagged? Supply is a little more certain. Energy companies continue to display capital discipline and oilfield service companies are at or close to near capacity. We're also seeing near -- or strong OPEC cohesion today. So they're holding to their production targets. And we're all monitoring the Ukraine conflict, which, of course, is very unfortunate. From our perspective, we've attempted to remain straightforward and pragmatic. And our strategy that remains consistent through these cycles. It's our view that this consistency drives value.

Okay. Let's keep looking in that forward mirror there, sticking to what lies ahead for Chevron. We know Chevron is hyper-return focused, which is great. Now Mark, you instituted a meaningful cost-reduction plan a few years ago. You're also about to hit into investment mode from your spec flip from investment mode to harvest mode in your large-scale project in Kazakhstan, which you mentioned earlier. I think we can all agree that given your strong free cash flow, the oil and gas business, it's firing on all cylinders, pun intended. However, as we mentioned in the previous question by Renee K, there is potential for weaker oil and gas prices. And while returns on the oil and gas business, they're perhaps better understood. I think the returns from lower carbon investments, it's a little less clear at least right now. And this matters to a lot of people because Chevron is committed to spending $10 billion on lower carbon over the next couple of years. So Mary K would like you to kind of put it all together and provide a peek into Chevron's future, and she asks, what do you feel is the expected profit margin within the next 3 to 5 years?

Thank you, Mary. At our Investor Day, which I believe was last month, we showed that we expect upstream earnings per barrel to increase over 50% at flat $60 Brent and an additional $5 billion in downstream earnings at mid-cycle margins after projects -- some of our growth projects come online. Well, I won't give you a specific margin number because that would be some competitive information. Margin expansion for us is mostly driven by lower cost per barrel. OpEx per barrel across our plan is expected to drop 10%. And because I mentioned earlier that we lead in capital efficiency, depreciation cost per barrel is also expected to come down, almost 20%. Examples of this management of cost might be the Permian development. Our Permian development largely leverages existing infrastructure. So we're using things that are already there. Similarly, at Ballymore, one of those Gulf of Mexico deepwater projects that I mentioned, it's tying into existing facilities. And the project we mentioned in Kazakhstan and in our large projects in Australia that are already operating, we're keeping those facilities full. So those are all very margin-efficient-type actions. Our portfolio has rebalanced over the years. The quality of our assets is way better and we've added higher-margin barrels into our portfolio.

Okay. That's what we like to hear, better assets and higher margins. We do have one last question, if we may, before we move to the energy transition. It's on inflation. So inflation is clearly very topical in our everyday lives. And yesterday, the Fed raised interest rates by another 25 basis points. Nobody is immune. So John C asks, what is the company's goal to keep up with inflation?

Thanks, John. Like most businesses, there was cost inflation in 2022. Permian inflation was higher than other parts of the world for our business. We've been able to mitigate some of those inflationary pressures through how we procure, how we partner and how we continue to get more efficient. An example last year, our cost to develop for ultimate recovery in the Permian was $8 per barrel, same as 2021. We also have examples one that I recently saw where people were leveraging drones to accelerate on-site work to save time and money. These are just a few examples. Our capital plan for 2023 assumes 5% to 7% inflation for the entire portfolio and low double-digit inflation in the Permian, where activity is much greater. In the Permian, actual inflation this year could be higher, it could be lower as several of our contracts are indexed, meaning they will be repriced throughout the year. However, we've secured rigs and well services contracts to deliver not just the 2023 plan but well into 2024. As you know, per your question, costs always matter. And you can expect us to stay on top of this because it continues to be important.

All right. That's good to hear. Let's see. Now I think with the remaining time we have left, let's shift gears to more specifically to energy transition. Mark, in our opinion, the world is moving in one direction for a lower carbon intensity future, and Chevron, you're clearly a major player in all of this. To be fair, though, there's a lot of uncertainty on how the energy transition will ultimately unfold. You have, for example, how quickly different technologies will advance? What will the regulatory environment ultimately look like? How much investment is going to be required? And how much of that cost are the consumer is willing to bear? So our last 3 questions, they focus on what Chevron's plans are for the energy transition and how do shareholders really get comfortable with those plans? In a nutshell, Jordan W asks how will Chevron continue to uphold shareholders' interest with the incoming shift in energy production?

Thank you, Jordan. Well, let's start with the big picture. We're very early into building a new and future energy system. As we mentioned earlier, energy systems that we have today, they're about 80% fossil fuels. The same as it was a few decades ago. I mentioned earlier that it took oil 40 years to go from just 1% of the world's energy mix to 10% of that energy mix. In fact, $4.5 trillion have been invested in wind and solar over the last decade, not so much by Chevron, but by others. And it's moved from 1% of global energy supply to 3% of global energy supply for wind and solar. At a high level, we believe that the energy -- the global energy mix will look a lot like today with modest changes in the next 10 to 15 years. But the future of energy is lower carbon, and we believe that all energy sources will be required to meet the energy needs of a growing world. Most project global energy demand will increase another 10% to 15% over the next 1 to 2 decades as the population grows and economies expand. The energy transition will look different and occur at different paces across different regions because people have different starting points and quite frankly, different needs. Consumption of oil is expected to shift in the coming decades with growth increasingly concentrated in diesel, jet and petrochemical feedstocks where the alternatives are less clear. We anticipate lower carbon energy sources will account for a larger share of energy supply in Europe and maybe the U.S. in coming decades with a broader set of energy sources required in Asia and emerging markets. We've been consistent. Our strategy is to leverage our strength to supply lower carbon energy to a growing world. Remember, we're growing our traditional oil and gas business and reducing its carbon intensity. And we're growing lower-carbon solutions for our customers. And we're doing the things that we do well, renewable fuels, carbon capture and sequestration, hydrogen, offsets and even geothermal. We use the same metrics to measure the economics for these investments that we use for any investments we make across the company. We need to be able to generate attractive returns to make these businesses sustainable, no pun intended. This is what we've been repeating for many years, higher returns, lower carbon.

Okay. Great. That was really helpful. Maybe just continuing to get in on the details there. Several investors have asked what type of green shift is Chevron taking? Is it towards solar, LNG, hydrogen, lithium, you've got geothermal, nuclear? Or is there something else? So Mark, can you help us and tell us more?

Well, there's a lot there. I might drone on with this answer. Thank you for the question. There is a lot there. Let me start by reinforcing that we're building on our capabilities, our assets and our customer relationships to lead in lower carbon intensity oil products and natural gas and to advance new products and new solutions that reduce the carbon emissions of major industries. Maybe said another way, we're doing our part and staying in our lane. As mentioned, we aim to grow our traditional oil and gas business while lowering the carbon intensity of those operations and grow new lower carbon businesses in areas where we have strengths like renewable fuels, hydrogen, carbon capture offsets and other emerging technologies. You can tell that we're targeting harder-to-abate segments that can't be easily electrified. So let's run through some of those examples that you mentioned in your question. Let's start with wind and solar. Chevron is not planning large-scale investment in mature onshore wind or solar as this is a crowded space with low barriers to entry and quite frankly, low returns. We don't have a competitive advantage in that space nor the full electricity value chain. We'll buy wind and solar power in support of our operations, but we don't see producing it ourselves as something where we will add significant value. One of the other areas you mentioned was liquefied natural gas or LNG. LNG has been a part of our portfolio for quite some time, and we are growing it. We have a large LNG position in Australia. And in fact, last year, we delivered a record number of cargoes, 10% higher than our previous record. We also have LNG in West Africa, in Angola and Equatorial Guinea, primarily serving customers in Europe. And about the middle of this decade, we'll also start exporting LNG from the U.S. Gulf Coast to customers in both Europe and Asia. And lastly, we have a large gas resource position in the Eastern Mediterranean and Israel that's currently producing, and we're evaluating options to further monetize that gas beyond serving just local markets. Another area you mentioned was renewable fuels. Today, Chevron is the second largest bio-based diesel producer in the United States, and we're participating across the entire value chain, feedstocks like crops and waste, manufacturing and sales. And last year, we acquired the Renewable Energy Group, and that included a Geismar asset where we have a large renewable diesel expansion project underway. In fact, we're more than halfway to our 2030 production capacity target. In addition to the acquisition of the Renewable Energy Group, we also have a very strong joint venture with Bunge, which focuses on soybean crushing, oil seed technology, things that allow us to get better and better at this feedstock opportunity going forward. And we're also a leader in capturing fugitive methane from dairy farms and turning it into renewable natural gas and compressed natural gas. I think another area you touched on was carbon capture and offsets. Today, we're a part of 2 very large carbon capture sites today, one in Canada and one we operate in Australia. But if you step back, our approach to what we call CCS or CCUS, is securing poor space in strategic areas and the areas where we already do lots of business, creating regional hubs by engaging emitters and partners and coalitions and then advancing the capture technology so that this can become more and more economic over time. I think you also mentioned hydrogen. Well, we're a large producer of hydrogen today. We actually use that in our refineries. Looking at lower carbon hydrogen in the future, we're advancing the concept of production hubs. And this really means leveraging what might look like the natural gas value change that exists today. So we're trying to enable technology and we're working to support with partners' future demand. We also hinted at geothermal. We have operated very large geothermal sites in our past, and novel technologies like enhanced geothermal systems and advanced closed-loop technology have potential and even broader application. In this area, we're taking more of a pilot project approach to these as we get clearer on the future they might have. And then finally, I think we mentioned nuclear. We've made some small investments through our technology venture company in a company called Zap Energy but it's really not a focus for us. We're watching to learn, but it's likely not an area of high investment. And then obviously, we'll continue to monitor for nascent and potentially disruptive technologies for the future. So you can see that we're trying to pay attention, and we're leaning in, in the areas where we have strengths.

Jeez, that was a lot. Thank you. I know I learned a lot. So thank you for that. And I guess we have our last question. Our last question comes from Mary M and [ Abilash K ], who asked, is Chevron going to make big investments in EV electric car batteries since the government's encouraging companies to do so, how will this affect Chevron in the future?

Thank you, Mary and [ Abilash ]. Today, Chevron is not investing heavily in electric car batteries because it's not our core competency. Remember, we're staying in our lane and doing the things that we believe we can do with a competitive advantage. We do supply petrochemicals that make the plastics required for electric vehicles. And we're working renewable Havoline e-drive fluid for EVs as well. On the issue of electric vehicle charging, generally, customers want to charge their EVs where they sleep or where they're going. That said, we do have charging stations at some of our retail facilities around the world and we've worked with companies like EVgo and ChargePoint to make that happen. Stepping back, the majority of global oil demand goes towards things like petrochemicals, industrial applications, off-road vehicles, equipment, mining trucks, planes, trains and even heating. And so only 25% really is pointed towards gasoline. Electric vehicles have been a part of our long-term planning for years. We model a significant penetration of EVs by 2040. And today, electric vehicles in the United States make up about 1.2% of the light-duty vehicle fleet. So all of the products that we offer today remain in high demand. Our job is to safely and efficiently deliver those products to customers in a way that also delivers higher returns, lower carbon and shareholder returns for you.

Well, Mark, time flies when you're having fun. So that concludes our time on today's Chevron's Exchange Q&A Session. We appreciate your discussion.

Thank you very much. I just want to thank you for being here in person. It's nice to be with you here in our San Ramon office. I want to thank everybody for joining. Chevron takes it all of its investors seriously, and we appreciate you participating today. Very, very thoughtful questions. And as you would expect, we appreciate your interest in Chevron. Thank you very much.