Chevron Corporation (CVX) Earnings Call Transcript & Summary

Thank you very much. We're very excited about our keynote conversation for the conference between Mike Wirth, Chairman and CEO of Chevron; and David Solomon, the Chairman and CEO of Goldman Sachs. These are 2 executives that really require no introduction, but I'll just say thank you both for making the time for being here. It means the world. While the franchises of Chevron and Goldman Sachs may have very different business models, there's a lot in common. Culturally, both trace their history back to the 19th Century, both Dow 30 components, both very global, geopolitically connected. For Chevron, this is a really important time for the organization. Mike and I were talking about that last night with the in-service of the large project in Kazakhstan, Tengiz, the potential for closing of the Hess transaction, as we heard from John Hess yesterday, and the inflection in free cash flow in the Permian, Tengiz, Gulf of Mexico and those cost reductions ahead of us as we move towards 2026, not to mention the fascinating backdrop for oil, power and the election. So looking forward to the conversation. Thank you both again for sharing your insights with leading investors, CEOs and executives. And with that, let's welcome David Solomon and Mike Wirth.

Thank you very much, Neil. Good morning, everybody. Welcome. The only thing I can tell you is that it's warmer in Florida than it is in New York. When I left last night, it was 24 degrees, and so it's delightful to be here in the high 50s in Florida. Mike, it's great to have you here.

I want to jump right in. First of all, I appreciate you being here. I appreciate the opportunity to chat with you. It was an eventful year. I had a busy year. You had a much, much busier year. You had a very, very eventful year. And I think about -- you spoke here a year ago. I kind of want to -- you to kind of walk us through at a high level kind of where the company is, Kazakhstan, the acquisition of Hess, the inflection of free cash flow by 2026. Kind of walk us through at a high level, kind of a strategic update. Where is the company? Kind of as you look forward in 2025, how are you feeling about things?

Yes, I'd be happy to do that. First of all, Neil, thanks for the kind introduction. And David, thanks for coming down here. Our relationship with Goldman goes back many decades, and it covers all aspects of our business and is one of the really, really important business relationships we have. So it's a pleasure to be here. Last year was a big year for us. We achieved a number of really important project milestones on our way towards delivering some very strong free cash flow growth over the next few years. Projects in the deepwater Gulf of Mexico, in Kazakhstan, some things in our new energy space with green hydrogen, renewable diesel. In the third quarter, we delivered the highest production in the history of our company for the third quarter. And so we've got a lot of strong momentum coming into 2025, where we will see further significant project start-ups in Central Asia, in the deepwater Gulf of Mexico -- or Gulf of America. And in some other aspects of our business, we announced some further reductions in operating costs and capital expenditures. Capital discipline and cost discipline always matter in a capital-intensive industry like this one. And we're well positioned to deliver, by next year, $6 billion to $8 billion in additional free cash flow growth and then a couple of billion dollars of cost reductions on top of that. So we've got a very strong balance sheet and a really consistent record of returning cash to shareholders through the cycle, both when times are good in our industry and also when times are difficult. And it positions us, I think, to continue to compete through the cycles and be a strong investment component in people's portfolios.

Sure. Let's talk a little bit about the macro environment and the macro setup. You and I were just talking -- certainly, when you step back and you look at the change in the business environment, it's got to be more constructive. Every CEO I've spoken to over the last 12 to 24 months felt we were in a very, very complex, over the last 12 to 24 months, business environment from a regulatory perspective, from kind of a growth agenda perspective. We obviously have a shift with the new administration. But the macro environment, when you look at geopolitics and you look around the world is pretty complicated. We certainly have had volatility in commodity prices. Give us kind of your top-down macro view, both locally but also globally as to how you see things setting up in 2025 and into 2026.

Yes. So certainly, the U.S. economy continues to power along pretty well. And we've avoided a hard landing. The Fed has navigated things, I think, pretty effectively. Globally, Europe hasn't been great, but it's managed its way through the risks associated with the conflict in Ukraine and particularly the energy risks better than it looked like they might a couple of years ago. China has been a big concern from a global point of view. And I think it remains that way as we head into 2025. It's been certainly such a strong engine of global growth over the last decade or 2 that we'd like to see China sort itself out and have a more solid and secure outlook going forward. But I think when you step back from it all, we're seeing decent growth globally still in that. It's against the backdrop of a lot of risks that the world has encountered over the last couple of years for sure. So we've got a reset politically in the U.S. In a number of other countries around the world as well, we're seeing the political winds shift and generally speaking, I think, in a direction that should be good for economies and good for business. As you say, a commitment to less regulation, I think, a commitment to investment and growth, that will be good for economies around the world. So we're relatively constructive. We're mindful of the risks, and there are certainly many, many risks that you can identify out there.

Yes. Talk a little bit about commodity prices. What's created movement and volatility? And as you kind of think about energy supply and demand, how do you see this playing out from a commodity price perspective over the course of the next 12, 24 months?

Yes, we've been pretty range bound on crude oil, in particular, and in large part because OPEC and OPEC+ have continued to try to manage supply to keep supply and demand relatively balanced, not an easy thing to do. We've seen pretty strong supply growth in oil in -- particularly in this hemisphere, whether it's North America or South America. And against the backdrop of decent demand growth, I mean oil demand last year was an all-time record, and it will go up again this year. It'll be an all-time record again. Gas, we've seen some firmness here recently as the weather has gotten colder. That's been true in Europe as well as here in North America. And I think in the medium to longer term, you certainly see some things that, for North American gas, would suggest we're going to see demand growth. Whether it's for LNG exports or to support increased power demand here in the U.S., we see a pretty constructive future for gas. So commodity prices in our industry are a function of supply and demand. I think supply looks pretty adequate out there. Demand, as I said, is continuing to grow. So we don't have a particularly bullish or bearish outlook on prices for this year. There's certainly some downside risks if OPEC+ were to bring supply back in excess of what the market needs. And so that's an issue they're going to have to consider and navigate. As I said, they've done a pretty -- I think, a pretty reasonable job of matching those 2 over the years since COVID, and so we'll have to see how that plays out. But I don't think there's a lot of upside or downside risk that we're very concerned about. You have to be prepared for both, which is why we keep a strong balance sheet. The growth in free cash flow positions us well, and you have to be prepared for any environment in our business.

So I'll touch on LNG for a minute. Again, some chatter about potential medium-term oversupply of LNG. Chevron's view?

Yes. LNG is a commodity that demand for it grows in kind of a gradual fashion, and supply tends to come on in big tranches as you get projects that bring multiple trains of LNG into the market. And so you can go from a relatively tight market to one that's oversupplied pretty quickly as you see a few projects come online. We've seen some delays in things due to some of the issues here in the U.S., big projects underway in Qatar right now that will come online over the next few years. Some of the U.S. projects will come online. So I think it's fair to say that over the back half of this decade, we probably head into a slightly oversupplied position at some point as a lot of that supply comes on. But that's not really new for LNG. That's kind of the way the LNG markets have always worked.

Yes. One of the things as I travel around and talk to people, the theme of growing power demand, particularly here in the U.S., is a big, big macro theme. Talk a little bit about how Chevron is positioned to help meet changes in power structure and demand over the course of the next decade.

Yes. It certainly is a topic. I know there's been a lot of discussion about here. We've been deeply engaged in conversations with the different hyperscalers that are involved in the data center build-out and developing these new AI tools. And there are a few things that I take away from those conversations. Number one, there's a kind of an arms race underway. I mean everybody wants to move fast. These models are powerful. And you need the compute to train them and to build them out. And as the functionality and the range of application continues to widen, the need for that compute only goes up. And we're certainly seeing that in stocks like NVIDIA and others. The second thing that's also pretty clear is that the national security implications of these models are real, and the potential uses in sensitive applications lead to some issues that governments care a lot about. Keeping the models and the data centers secure is very important. And I think what that suggests is you're going to see this done for the large -- a large part here in the U.S. for models being built by U.S. companies. That leads to the question about power in the U.S. We've got a grid that is straining right now to deal with the introduction of a lot of intermittent generation capacity, the normal variations in load and the fact that our grid was built decades ago to serve a market that's very different than the market we have today. And adding a lot of new generation that comes in through the grid is slow. The backlog on interconnects is lengthy. And frankly, a lot of the generators are struggling to see how they can build out the capacity for a unique and small set of customers when things have to go in their rate base for a large set of their customers. And so it leads you to discussions about behind-the-meter power that doesn't come through the grid but is really built to serve data centers. And as you start to look at the reliability means of those data centers, you come back to things like natural gas and say, nuclear would be great. And you're seeing a lot of talk about nuclear, but small modular nuclear is probably a decade away from most of the people I talk to that are working on those technologies. And the hyperscalers really can't wait that long. And so the good news is America is blessed with an abundance of natural gas. And I think you're going to see a build-out of natural gas-fired power generation that will support these data centers. We're certainly working on ideas like that. The other constraint that exists is just access to the big turbines. And so there are only a few manufacturers of these -- the largest turbine -- gas-fired turbines in the world. And their order books are pretty full for years and years out into the future. And so people that are in the queue with slots for delivery in the next few years, I think they're going to be well positioned to help meet this need.

Let's talk a little bit about the incoming administration. You and I chatted for a few minutes. High level, impacts broadly of the policy initiatives on the company and also the energy sector as a whole.

Well, we certainly have seen President Trump make energy a key component of his platform. And his team that he's putting in place, he has a very qualified team. People in this room, I'm sure, know Chris Wright. Some of you may know Governor Burgum as well, but at Interior and DOE. We have 2 of the most qualified nominees I've seen in my entire career. These are people that have -- Chris Wright has worked in this industry. He understands the industry very well. Governor Burgum understands how both private and public lands can be stewarded for energy development and done in a very responsible manner. And it stands in contrast to some of the other nominees we've seen in other administrations. So I'm very optimistic that we will see a team that understands this industry, that understands the importance of affordable energy to our economy, that understands the importance of reliable energy to national security and to our allies and also understands the importance of protecting the environment. In fact, I've spent time with both Chris and Doug in the Western U.S., where they spend a lot of their time outdoors. And there's nobody that cares more about preserving our environment than people like that. And so I'm very pleased with the team that has been nominated and, I'm sure, will be confirmed. And I think President Trump clearly sees that some of the policies of the current administration have been mixed at best in terms of the signals they send for investments and have not necessarily, I think, served the economy as well as they could. And so I'm optimistic coming in. I think President Trump's got a broad set of priorities and an ambitious agenda that he intends to pursue, but I think energy is right there among the top priorities, and we look forward to working with the administration to encourage sound policy that's good for our economy, good for our security, good for our competitiveness.

Yes. If you think about the energy sector broadly, I mean, this is something I've watched -- somebody who's watched markets for over 40 years. The growth in technology has obviously rebalanced the role that the energy plays -- the energy sector has played in the overall market cap weighting to markets. How does that evolve and shift over time? I mean energy is still so important to the overall ecosystem, the economy. Technology is driven by power and energy. But the attention that the energy sector gets from investors at the moment is different than what it's been. Now they're pendulum -- the pendulum swings back and forth, and it's certainly swinging back. But talk a little bit about how you think about that balance and the attention that the energy sector gets from investors right now.

Yes. It's a point of frustration. I think we are underappreciated in the investment community. Now look, if you go back to the twenty-teens, some of this is self-inflicted. The industry overinvested in growth. It didn't return cash to shareholders the way that it should, and shareholders became frustrated. And I heard about this from a lot of shareholders, some of whom are in this room. So I think companies have learned from that. Virtually all companies in the sector now are returning cash to shareholders through both dividends and share repurchases. Our company has done this for a very long time. But performance matters. And I think companies in our sector need to perform for investors. We need to deliver value for investors. We need to generate strong returns. And certainly, when I talk about Chevron, we long have had a very consistent set of financial priorities. The first is to sustain and grow the dividend. We've increased our dividend payout for 37 consecutive years through wars, terrorist events, market downturns, pandemics, et cetera. We've got to invest to generate cash flows for the future. And we've been very consistent but disciplined in investing to grow future cash flows. The third, in our industry, you have to keep a very strong balance sheet. We've got a AA credit rating. Right now, we're underlevered. We're probably around 10% net debt, which is well below our history or where we need to be given our capital needs. But you have to be prepared for downturn in markets, and you have to be prepared to lean on your balance sheet. Companies forget that and find themselves out of position at times when unexpected market events develop. And then excess cash ought to be returned to our shareholders. We've repurchased shares 17 of the last 21 years. Over the last 2 years, we've returned $50 billion to our shareholders through our dividend and our repurchase. Our market cap is a little over $250 billion. So it's a pretty significant return of capital to shareholders. I think over time, shareholders are going to see the value in that. The duration of these cash flows is much longer than, I think, many people perceive. I talk to young portfolio managers that have grown up kind of in the era my kids have, and they think that demand for oil and gas is going away tomorrow. And of course, it's not. As President Biden said in the State of the Union Address, at least 10 more years. And I'm pretty sure that we're going to see a lot more than that going forward. And so I think the duration of the cash flows is underappreciated. I think the discipline in the industry is very real. And I think the returns to shareholders, I mean our dividend yield right now is very competitive with a 10-year treasury, and you've got the upside of equity exposure to an industry that generates 8% of the -- 8% or 10% of the earnings in the S&P and yet is market weighted at less than half of that.

Yes. Yes. Let's shift a little bit to operations, if that's okay. I want to talk about the portfolio, talk about the asset base a little bit. We'll start with Kazakhstan. Talk about kind of the accomplishments around that project in 2024, key milestones and kind of what's ahead of the first oil expected later this year.

Yes. So for people that might not be familiar with our position in Kazakhstan, it is one of the supergiant fields in the world. This is a field that was originally developed under the Soviet Union. When the Soviet Union collapsed, Kazakhstan became an independent state. And in 1993, our company entered into this project at a time when it was producing a few tens of thousands of barrels a day. Today, it produces roughly 700,000 barrels a day. And we have a project underway that will take production at this field up to 1 million barrels a day at a single field. It's a project that's been underway for quite some time through COVID and has had challenges through that period of time. But over the last 12 months, we have steadily moved towards start-up commissioning of a large project to take this field, which is larger than the island of Manhattan and reduce the back pressure so that the oil and gas can flow more readily into the plants. And so large compression and pumping to move the fluids and the gases into the process facilities and then large process facilities to bring 260,000 barrels of oil to market and reinject all of the sour gas into the field for pressure maintenance. So we are moving into our initial start-up procedures here in the first quarter on this project. We've got hydrocarbon circulating through a significant portion of the plant right now, and construction is complete. And we look forward to starting up in the first half of this year ramping to, as I said, 1 million barrels a day. And that will turn this from a consumer of cash over the last decade to a strong generator of free cash for our shareholders.

So if you zoom out, this is a huge project, huge undertaking. Learnings that will impact how you think about other big long-term investment projects in the future?

Yes. This is one of the largest projects we've undertaken in our history. And there's a couple of learnings. Number one, I described the project to manage the field pressure and then also a project to add incremental capacity. The decision was taken a decade ago to do both of these projects simultaneously on the belief there were economies of scale. There were also challenges of complexity in trying to execute 2 projects of such a magnitude simultaneously. We've had nearly 100,000 workers on site at times. The supply chains are stretched across dozens of countries. And I think there's a complexity management lesson that we will take away from this that when we can break things into discrete pieces that the risks can be managed better than aggregating things. I think we falsely convinced ourselves that we might have more economies of scale, and we underrecognized some of the challenges of complexity on this. Second lesson I would say on this one is we need to have sufficient engineering done when we take a final investment decision. We've done a lot of engineering when we made the final investment decision here, but I think we would have been better served to have advanced our engineering even further to have scope more clearly defined and detailed engineering more fully completed. And then probably the third lesson is simply in execution, having an even more thorough plan for the right resources on the ground during each and every stage of construction, commissioning and start-up and a dynamic system to manage those across a project that's complex so that we can stay on top of things as the state of the work evolves. We certainly plan for that. But I think there's going to be some lessons for us and better planning in the execution phase.

Good takeaways. Good takeaways. You're also making a big push to grow production in the Gulf, I don't know, Mexico or America.

I call it the Gulf.

The Gulf. Talk a little bit about the ramp profile of those investments and kind of what you see coming out of that and some of the milestones you've kind of laid out around increased production there.