ExxonMobil Holdings Corporation (XOM) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to ExxonMobil's earnings call. Today's call is being recorded. We appreciate you joining us. I'm Jim Chapman, and I'm joined by Darren Woods, Chairman and Chief Executive Officer; and Neil Hansen, Senior Vice President and Chief Financial Officer. This quarter's presentation and prerecorded remarks are available on the Investors section of our website. They're meant to accompany this quarter's earnings release, which is posted in the same location. During today's presentation, we'll make forward-looking remarks, including comments on our long-term plans, which are subject to risks and uncertainties. Please read our cautionary statement on Slide 2. You can find more information on the risks and uncertainties that apply to any forward-looking statements in our SEC filings on our website. We also provide supplemental information at the end of our earnings slides, which are also posted on our website. And now I'll turn it over to Darren for opening remarks.

Good morning, and thank you for joining us. Unfortunately, as all of you are aware, the conflict in the Middle East continued to the second quarter, impacting our employees, partners and operations in the region. I want to begin this morning by recognizing the service of the men, women engaged in the conflict and the hardships being endured and losses suffered by those in the region. They remain at the forefront of our thoughts, and we continue to pray for a quick resolution. As a company, we remain committed to mitigating the global impact by maximizing production and providing the energy and products essential to modern life. While we didn't anticipate the current situation, we were prepared for it. And our markets disruption is inevitable, establishing globally diverse production at scale, across value chains, built on a foundation of durable advantages provides a robust platform for creating value through price cycles and market disruptions. The second quarter demonstrates the strength of our approach. Despite the temporary loss of approximately 10% of our upstream production, we delivered exceptional financial results, including industry-leading earnings of $14.5 billion and cash flow from operations of $23.6 billion. Performance was strong across the company. In the Upstream, excluding the Middle East, we delivered our highest production volumes in more than 2 decades in Energy Products, our integrated U.S. Gulf Coast refining operations ran reliably as global diesel supply tightened. The business delivered record second quarter diesel production, helping meet market needs. In Chemical Products, our North American facilities with advantaged feed and record first half reliability, helped meet the shortfall in supply caused by disruptions in the Middle East, driving a roughly 180% increase in chemical product margins versus the first quarter. In Specialty Products, our integrated approach down the value chain, reformulation capabilities, global footprint and strong execution, help meet customer needs despite significant supply challenges, delivering best-ever basestock margins and record quarterly and first half adjusted earnings. Guyana remains one of the clearest examples of our advantaged growth. In the quarter, Guyana delivered gross production volumes of approximately 900,000 barrels per day. [indiscernible], our fifth SPSO, set sale toward Guyana in June and remains on track for start-up by the end of the year, the next major step in Guyana's continued development. Long tail is on the path toward final investment decision, and we are evaluating the potential for FPSO. The success of this development has set a new standard for the industry and frankly, has exceeded our own expectations, delivering on tight schedules at industry-leading cost with strong reliability and optimized production as a result of recovering our capital and cost nearly 2 years earlier than anticipated, increasing NPV and desaturating the cost bank. This is great news. But as a result, our volume entitlements will change as reflected in our 2030 plan. As always, our focus remains on value, not volume. Turning to the Permian. This quarter, we set another production record of more than 1.8 million oil equivalent barrels per day. More importantly, we continue to improve recovery and lower capital costs through new technologies deployed at scale. Our industry-leading acreage position supports extended reach development. including 4-mile laterals to drive superior capital efficiency. In the first half of the year, we drilled more than 80 4-mile wells, supported by our Houston-based remote operations center in real-time data that helps ensure safe, efficient and effective execution. During the quarter, we had to work through some complex conditions. Logistics were tight, supply chains were constrained and customers were short of critical products. Our global trading and supply chain organization put our new operating model to work, optimizing feedstock and product placement, balancing supply across regions and responding to localized disruptions. Those actions kept our operations running and customers supplied. It helped avoid roughly $750 million in annual disruption costs through advanced modeling, fleet reallocations product reformulations and alternate supply sources. At the same time, we continue to make progress on our transformation. On July 1, we integrated upstream operations into our global operations organization, bringing together approximately 31,000 employees across more than 150 sites in 48 countries. This is an industry-first operating model. The objective is clear, make the most of what we have while raising the standard for safe, reliable and efficient performance across all our assets. With this new organization, we expect to deliver improved margins and industry-leading operations excellence, improving safety, reliability, maintenance costs and turnarounds across the portfolio. We are also advancing our enterprise-wide process and data platform transformation. As I've said before, this is redesigning end-to-end processes and connecting data, transactions and decision-making across every business, geography and function. Early deployments have gone well, building a strong foundation for larger rollouts in 2027. The work is already simplifying processes, improving line of sight and replacing fragmented reporting with more consistent enterprise data. As it progresses, who will help us learn and act faster, better leverage our scale and accelerate the adoption and value of AI. The value of this transformation is showing up in our results. cumulative structural cost savings have increased to $16.3 billion since 2019, with centralized organizations contributing nearly half of the year-to-date savings. Financially, this was a strong quarter with more than $14 billion of earnings, more than $17 billion of free cash flow and a more than $7 billion reduction in net debt. That strength allows us to keep investing in advantaged opportunities, return surplus cash to shareholders and maintain one of the strongest balance sheets in the industry. Cash capital expenditures were roughly $7 billion, and we returned more than $9 billion to shareholders through dividends and share repurchases. Finally, in the quarter, shareholders overwhelmingly supported redomiciling ExxonMobil from New Jersey to Texas, which we completed on July 1. The move aligns our legal home with our headquarters and where we have operated for more than 3 decades, while providing a stable, predictable and efficient governance framework that supports sound decision-making long-term value creation and shareholder rights. When I thank our shareholders for their support and the quality dialogue we had across the years engagements. Stepping back, the second quarter was shaped by disruption, but defined by execution. The market benefit was real, and so was the value created by the choices we have made over many years to strengthen the portfolio. lower our cost structure and improve how we operate through deeper integration and technology-enabled execution. That is the point of our transformation. We are building a company that can perform through disruption and deliver superior long-term shareholder value across cycles. Thank you.

Thank you, Darren. Before we move to Q&A, 2 things to note. First, as a reminder, the Investors section of our website provides further data on our results and operations, and we encourage investors to take a look. And second, I want to highlight that we plan to publish our annual global outlook in September. A comprehensive report detailing our latest views on global energy demand and supply through 2050, which forms the basis of our long-term business planning. So with that, we can move to Q&A. [Operator Instructions]

[Operator Instructions] The first question comes from Steve Richardson Evercore.

Darren, I wonder if you could start on Guyana. Obviously, what we've all known is really high-quality projects. Can you just talk about this desaturation point, obviously, in light of cost performance and higher commodity price? And maybe just how the timing compares to maybe what your previous expectations were? Also curious if you could talk a little bit about exploration. There's a mention in the disclosure about using AI tools and generating prospects. I think people are also curious about what the exploration outlook in Guyana is, particularly as you think about parts of the block that maybe are underexplored close to Maritime boundary.

Sure. Steve, thanks for your question. I think as you pointed out, it's a real success story in what we've achieved in Guyana, delivering, frankly, the production units faster than we had originally anticipated at a lower cost, running those assets above the investment basis. And then obviously, the market prices have been higher than our base assumption. So all that means more cash sooner, which is good for the project, good for NPV, good for Guyana and the people of Guyana. Obviously, we recover our costs back faster and therefore, desaturate quicker, which is a good story. And I would say we -- that was a moving target as prices manifest themselves as we deliver those units and continue to grow production, we kept updating it and then based on price forecast. Our assessment would be happening later this year, early into next year, and that's obviously come forward now with where prices have been. So I think a really good news story. With respect to exploration, I think, too, another good new story. We obviously have a large chunk of acreage, which is in force majeure waiting for the ultimate ruling from the International Court of Justice on the Venezuela dispute. And when we'll see what happens there. We feel there's an opportunity then to start shooting seismic and understand what that acreage potentially holds. And we've got more work to do in the acreage that we've already shot and the work that we've been doing. Think Neil -- Chapman had mentioned at a prior conference this year that we really put a lot of effort into artificial intelligence and training models based on what we found already all the drilling that we've done, the characterization of that subsurface and have unleashed that and the rest of the block and have 4 new discovery opportunities above and beyond what we thought were opportunities. So we're we're optimistic there. Obviously, a lot more work to do to confirm those. But I think our view is we're not done yet and going on it, and we see -- continue to see a really bright future there.

Maybe, Darren, just to add to the comments on Guyana. I think this reinforces why we are the partner of choice, especially for developments of the scale. And if you look at the desaturation and Darren mentioned the price impact. But even if you took out that price impact, we saw a 2-year acceleration of our investment recovery and those go back to the things that we mentioned, the ability to execute these projects at industry-leading cost and schedule, running the FPSOs at above 98% reliability, optimizing, being able to produce 100,000 barrels a day above the investment basis. So even without the price impact, we're seeing accelerated recovery of our investment. And as Darren mentioned in his opening remarks, this is about value, not volume. And going forward, we're going to see 2x the level of free cash flow in 2030 than we saw in 2025. So again, just speaks to the tremendous success that we're seeing in Guyana.

The next question comes from Neil Mehta of Goldman Sachs.

Darren, just love your perspective on the business that you spend a lot of time growing up on the refining system. It's obviously the bottleneck in the petroleum system right now and margins are exceptionally high. So 2 perspectives on that. One is how do you see the situation evolving as you think about the product? And then Neil Hansen, there's probably a question for you on the quarter itself. It did feel like relative to some of the independents the refining earnings were a little softer than I would have thought. And so maybe there was some -- it was more a timing or operational things, but how do you see that progressing as we move into the third quarter?

Yes. Neil, I'll start and then hand it over to the other Neil. I mean as I mentioned this morning, we are a very large refinery, much larger than any of the other IOCs. In fact, we're the #2 in size in the world behind China and outside of China. We are the largest refinery. So we've got a good footprint. And as you know, we have been -- we spent the last 10 years really focused on optimizing that portfolio, divesting refineries that we didn't feel like we could move to the left of the cost of supply curve and then investing in those refineries that we felt like had long-term strategic value and high-grading the yield on those refineries. So today, we have a portfolio that will be very successful in low-margin environments. And then obviously, in higher margin environments, even more successful. And the organization is now very focused on in the short term with these significant constraints in product flow, maximizing production and getting the most needed products to the market and meeting customer demands where there's such a critical need today that's not being met. I see that, frankly, the challenge here is, obviously, with the straight close, we've got about roughly 3 million barrels a day of capacity that's not available to the marketplace. China has stopped exporting. There's another couple of million barrels a day of refining capacity that is not available to the market. And then, of course, Ukraine has been pretty effective at taking Russia refining capacity out. And so another million barrels a day or so of Russian refining capacity that was providing product to the broader market. So with all those that supply out, we're well below available capacity, frankly, that I've ever seen. If you exclude COVID, there was no demand. I've never seen the available capacity relative to demand as low as it is today. It's going to take a while for the industry to kind of climb its way out of that hole. And so from our perspective, we think we're going to continue to see a very robust refining market with very high margins. And of course, our job will be to continue to push as hard as we can to maximize production and try to meet that need because we do recognize that these high margins lead to high product prices, which we also know has a significant impact on consumers and people's pocket book. So we're doing our best to put as much product out there as we can. And I think you see that in the results. I'll just touch on the mix issue and what you're seeing at other refiners versus ExxonMobil. Nobody has the portfolio that we have. Nobody has the mix that we have. Nobody has the geographic footprint. So there's a lot more mix and variability that kind of happens around the market than maybe a stand-alone U.S. refiner or some of these more narrowed refinery companies. But with that, I'll see if Neil has got anything else to add.

Yes. Let me -- maybe before I get to your question on the quarter, you talk a little bit about Energy Products business. And you look at what we've done over time in terms of investments in our refining capacity, improving the complexity and taking advantage of the scale of our footprint. The portfolio high-grading that we've done and then the day-to-day efforts that we put into place to optimize throughput and capacity and all those things, combined with the growing capability and trading really has resulted in a step change in earnings in that business and Energy Products. In fact, if you look at the contribution from Energy Products to our overall business line earnings -- it's gone from about 9% to about 23% in the last 5 years. So that increase just speaks to the investments we made. It speaks to how we're running and speaks to the trading capability that we've built. And operationally, we ran really well in the quarter. You look at the U.S. Gulf Coast refineries, the reliability exceeded 95% in the quarter. So again, we feel really good about what we've done to strengthen that business over time and how we operate in the second quarter. I think when you look at the quarter, relative to consensus, I think some of that is, as Darren talked about, I mean, there are a lot of moving parts, especially with the volatility and the disruption that we saw. So I think that had an impact on projecting some of those refining margins, but no underlying concerns with how that business has performed, and we're benefiting from the investments and how we're operating in Energy Products.

The next question comes from Arun Jayaram with JPMorgan.

Darren, I was wondering if you could help us understand what you're seeing on the ground in terms of the Strait of Hormuz, perhaps you could highlight what you saw in July, just given the disruption impacts. And I guess my overall question as well, I wanted to see how you're thinking about with your partner, Exxon's intention to invest in the repair of the 2 Qatar LNG trains. If you come up with your partner on the plans to repair those facilities?

Yes, sure. Arun, thanks for your question. I don't think I have a lot of additional perspective on the ground with respect to what's happening in the strait. I think it's fairly well covered in the media. And frankly, any discussions I tend to have with the administration is more focused on our perspective of the market. And the implications of a constrained supply and how that will manifest itself. I will say as a big supplier in the marketplace, it is ultimately down to the shipping companies and the crews on those ships to make those transits. And I think the more volatility there is, the more back and forth with respect to disruptions and attacks, you create more uncertainty, more concern and, therefore, less willingness to transit. So I think there's going to be a continued inhibition for movement, which will even once we get things cleared up, I think it will take some time for folks to gain some confidence there to continue to ramp things back up to a very high level. And frankly, we're prepared for that with respect to what we're trying to do. With respect to the broader question, our presence there and the work that we're doing with Qatar, I just come back to the medium to long-term fundamentals, which the world needs the resources in that region, and it needs to have the strait open and transiting back at levels it was prior to this conflict. And so we're convinced that, that will come to be at some point in the future. And I can't really predict when it will happen or exactly what it will look like. I just know that it's too critical to the overall health of world economy and for people -- to meet people's standards of living to have that disrupted for perpetuity. So it will come back. It will be needed. We've got a long relationship there. We value the partnerships we have. We're in dialogue with QatarEnergy. I think we have a particularly significant role that we can play to bring our expertise to help expedite to repairs. We're in discussions with key about that and frankly, looking for the best approach there where obviously, QatarEnergy and the people of Qatar benefit and ExxonMobil benefits as well. And so I think the one thing I would say about our long, long-standing relationship with QatarEnergy as they recognize the importance of win-win solutions and certainly very focused on how we figure out the path forward here to get production back on and flowing as soon as we're able to.

The next question comes from Devin McDermott of Morgan Stanley.

Darren, you highlighted -- really strong non-Middle East upstream production in the quarter, the highest in over 2 decades. You talked a little bit before about Guyana and one of the other drivers of growth is the Permian volumes at 1.8 million BOE a day in the quarter in line with your full year guide. I know that this year marked a big step-up in some of the use of advanced proppant and other new technology. I was wondering you could just give us an update on how that's progressing versus expectations, typically as it relates to capital efficiency and recoveries that you're seeing there across the basin.

Yes, sure. Thanks for the question, Devin. And you touched on, I think, one of the really important variables there, which is the progress we're making with respect to the technology portfolio. We've been talking for some time now that we've got plus technology developments that we're working and have been going out and trialing in the field. And the value of those technologies or most of them are stackable, so that you keep building on the success and drive more and more recovery, fewer wells, so less capital. And I'd tell you that, that portfolio continues to exceed expectations for the technologies that are successful. So I put out a challenge back in 2018 for doubling recovery, we have an opportunity set that we'll do more than that. And when you risk it for all the uncertainties associated with that portfolio, we're getting really close to that objective. And it's just a function of continuing to deploy those technologies and getting it to a critical mass to where it's transparent to the rest of the market as we continue to bring them into new production new wells. So I feel really good about that. I'm really confident what the team is doing a lot of energy and motivation by the technology organization and our Permian organization to deploy the technology and to see the benefits of that. So we're more than on track.

Yes. I think, Devin, maybe just to add to that. I mean there is a lot of excitement around the technology that's being developed and will be deployed. But I think you can easily look past the expertise and the technology that's already being used in the Permian. You look at things like extended reach laterals, I mean we're leading the Permian and long lateral development. I think in the opening remarks, we mentioned in mile wells that we've drilled year-to-date. But if you look back and you look at all the Permian producing wells since 2020, anything above 3 miles or longer, we have 1,200 wells. I think our nearest competitor is around 400, and you would have to go to the next 6 competitors to get to that same level of 1,200. So you look at the extended reach laterals, surfactants, AI, machine learning, all of that is contributing to very strong performance even before we start to deploy some of these other technologies.

The next question comes from Doug Leggate of Wolfe Research.

Darren, I hate to beat on Guyana. I wonder if I could come back to Guyana on a couple of clarification points or maybe more than that perhaps. I think there's some confusion between production entitlement and free cash flow, maybe it's for Neil. But I wonder if you could just opine on -- although your production interment goes down, what happens to your free cash flow? That's my first kind of part of that. And I guess I can't help but notice Phase 9 is now part of the story. What is your latest thinking on gross production sustainability through the end of the decade, maybe a little beyond that?

Yes. Thank you, Doug, and I'll let Neil talk a little bit about the free cash flow portion of the question. I would just say we're going through our plan process currently, which we will finalize as we get to the end of the year and then come out and talk about it as part of our corporate plan update. And as part of that, every year, we revisit to what are the opportunities, what progress have we made, how is our thinking developed. And indeed, one of the things that we now see an opportunity for is this 9th FPSO and really take advantage of what we've done with long tail to replicate that and get some significant capital advantages to apply. And so our view is that's looking promising. We haven't finalized that, obviously, but we're progressing and it looks pretty attractive at this stage. I think longer term, we've got more work to do. As I mentioned, one of the responding one of the earlier questions, there's a lot of acreage yet to fully take advantage of. And so we're continuing to exploration, continuing to look for opportunities. I mentioned that with some of the AI tools that we've trained with what we've already found in the drilling we've done. We have seen some new opportunities to explore that we hadn't previously identified. So I would tell you this thing, the tape hasn't run out on this play yet, and we're going to continue to evaluate that and see what we can get from it. But mean you can rest assured the organization is very focused on maximizing the value of that acreage for the benefit, obviously, back on mobile, but more importantly, for Guyana government and Guyana -- people of Guyana. But I'll let Neil talk a little bit about the free cash flow question.

Yes. Let me try to answer your question, Doug. So again, as we mentioned, at this point, we fully recovered the $55 billion of investment along with all the operating costs. And the way the contractor agreement works is we can recover that investment up to 75%. After that, the remaining production is shared 50-50 between us and the government of Guyana. And so if you think about -- if you just stop today and there's no additional investment, then more of your production and revenue is going to flow towards cash flow, again, shared between us and the government of Guyana. The reality is we have more investment. To the extent we have the investment come in and operating costs, it will still go into the cost bank. We'll still recover that at that 75% cap, but there's much less investment to recover. And given the level of production that we're at, you're unlikely to see that cost bank obviously be full again. And so you'll just have more cash flow above your investment and above the operating cost. Now that obviously is a question of what you think price is going to do going forward in addition to the investment and cost that we'll be putting into the cost bank. So hopefully, that helps. But we would anticipate, and I think we showed that in the slides, that now that we've reached full recovery of that significant investment, more of our revenues will go towards cash flow, free cash flow versus recovering cost and investment. Hopefully, that helps, Doug.

Neil, just to be clear, so is it fair to characterize this as an inflection in free cash flow then as opposed to a decline in production entitlement...

It's very much an inflection into free cash flow. Absolutely. And this -- for us, Doug, and I assume for you as well, this is about value. It's not about volume, right, even though there's a slight decline in the entitled volume the focus we have is on the value that we've created for ourselves and for the government of Guyana. And at this point, there's an inflection to where you're going to see a much larger amount of free cash flow come in. It is a very positive, exciting story.

The next question comes from Betty Jiang of Barclays.

We're seeing an increasing number of resource-rich governments looking for partners to accelerate the development of their resources. And as Neil said earlier, Exxon's track record, just really positioning you guys as a partner of choice. These are long -- large-scale long-duration resources but can also come with different set of risk. How do you evaluate these opportunities for Exxon and their competitiveness relative to what you already have in the portfolio?

Sure. Betty, I'll take that and then see if Neil wants to add anything to it. So I'd come back to the fundamental investment thesis that we have across all of our businesses is the projects that we pursue and ultimately advanced have to have an advantage versus what others in the industry can do. It has to -- we have to be able to drive the cost of supply to the far left of the cost curve so that the supply cost curve so that we know, irrespective of where the market goes and the ups and downs and prices and margins that will have investments that generate industry returns. And that's been the philosophy across every business that we have and all the projects that we evaluate. And the results of that are manifesting themselves today and all the investments we made over the last 10 years, that's not going to change going forward. And so I'd say, first and foremost, as we look at new opportunities, you got to clear that hurdle. Do we bring an advantage? Do we end up with a project that's advantaged versus the rest of industry? And is it at a very low cost of supply, and therefore, generate above-industry returns? And I think that's the criteria that all of our businesses are driving towards. And then, of course, when it comes to specific areas and risk -- country risk associated with those areas. The market tends to decide that. And so our view is we'll -- we will generate projects that realize the risk premium associated with any projects in some of those areas, consistent with the rest of the market, and then we'll add to that with our advantages. And then the final step is making sure that we manage that risk in the portfolio. One of the advantages of being large and having a very diversified portfolio is we can diversify out of a specific risk. So we don't have to bet the farm on any one location or any one place. And we keep a very close eye on the overall exposure of the portfolio and look at how that's developing and as we make investments is that portfolio risk changing significantly or not. So how we do -- what we've seen to date, you see it today with some of the disruption in the Middle East. You saw it several years back with the Russia disruptions that the portfolio is robust some of these unexpected events, and that's how we'll manage it.