Chevron Corporation (CVX) Earnings Call Transcript & Summary

All right. I think I will start a minute early, and just welcome everyone to the 40th Barclays Energy and Power Conference. My name is Betty Jiang. I'm covering the integrated majors and E&P space at Barclays. Note the theme of this year's conference is the global race for energy. I think given all the disruptions that we see, realize that all energy of all sources are needed. So have a pretty exciting 3 days of meetings ahead of us. So welcome again, and thank you for being here. This year, we are trying something a bit new. We have an audience polling questions where we'll be asking you to participate in answering some questions that I will be putting on the board on some of the sessions that you will be seeing in this conference. And -- but before I start, I do want to introduce Eimear from Chevron, and Chevron, thank you so much for kicking us off for this track on the majors and E&P. And please join me on stage, and we will start on some questions before we get into the fireside conversation. Let's see. Let's see if this is going to work. So we'll have 3 questions from audience polling, and you will have clickers on every one of your seats. And all you have to do is click the number corresponding to your view. Sorry, this is not the first question for this session. It should be about mid-cycle. What mid-cycle brent oil price are you using for your equity evaluation -- can we get to -- the right questions. All right. Well, clearly, that -- we'll try to figure that out for the next session. So -- but Eimear, thank you so much for being here.

I think I want to kick off the conversation with Venezuela because that's clearly the big news from this summer over the last month about Chevron's increasing investment in the country. So I want to start off the conversation there. Why now? And why do you -- what do you see that's so exciting about going into that country now?

Well, thanks, Betty, for having me here this afternoon, and good afternoon, everyone. We're excited because the new terms unlock competitive low-cost growth in Venezuela. And so that why we're excited. We've got new terms. We've got new legal provisions, and we're building on 100 years of history in Venezuela and 3 joint ventures that are operating really well. So that's what excites us. Why not? We were able to negotiate new terms. In addition to that, we've been able -- we were able to get additional acreage as well. That started back in April when we executed a swap and got contiguous acreage and more working interest. And then as part of the deal that we announced last week, we also got 2 other blocks, [ Caribou ] 1 and 2. And so we're just really excited. This is an enormous resource base, low cost, total cost less than $20 a barrel, a lot of run room. And so that's why we're excited and that's why we're growing.

And that's a pretty big growth when you're talking about doubling production to over 600,000 barrels per day by 2031. Can you just talk about the ramp-up cadence? Is there a plateau level? And how do you think about the cash flow contribution from that asset over time?

Yes. Well, the production will grow and the cash flow will grow with the production. That's really the punch line. If I put it in the context of the production today, we're producing about 100 -- sorry, 280,000 barrels of oil per day. And so we anticipate growing that to 600,000 barrels a day. So there's obviously a ramp over time. We intend to increase the number of rigs, so more than double the number of rigs with that. And in terms of investment, we intend to invest on a gross basis of $7 billion over that 5-year period. So that will take us into the early 2030s. 2031 is when we'll likely hit 600,000 barrels a day, and that will be close to plateau levels. We anticipate plateau will be -- to be between 600,000 and 700,000. And the large resource base gives us the opportunity to extend that plateau from 5 to 10 years, and that's just primary recovery. So that's just the initial recovery from the reservoirs. There's a lot more upside there. So I mean this is growth at low cost and very attractive returns. And so the ramp will happen over the next 5 years and then from the next decade, we'll be moving into plateau. I think the best way to think about this is we are developing -- or intend to develop this like the way we develop the Permian, it really is just another factory type development. And there will be a period of investment and a period of plateau. And so we're looking forward to adopting and scaling and implementing all the lessons learned from the factory experience that we have.

Right. No, that makes sense. I think the -- another area that we think about getting into this asset is it will require a lot of infrastructure and there's still questions around like, is the infrastructure ready for this type of growth. So can you just speak to the availability of the infrastructure in the asset now? And how much investment that's needed in order to enable this level of growth.

The infrastructure is in great shape. And so the equipment has been maintained over the last few years. So almost 3 years ago when we implemented a capital-efficient model for investment into our JVs, we have been dedicating since that time, we've been dedicating OpEx and CapEx to the fields. And that's allowed us to drill and grow production, but it's also allowed us to do maintenance programs and take care of the infrastructure and ensure that all our asset integrity programs are in place, process safety programs are in place, that -- we've been doing turnarounds. And so our infrastructure is in good shape. So we don't need a new infrastructure -- or significant infrastructure to be built to deliver the growth that we've guided to. Again, think of this as a factory where the infrastructure expansions will be more like small tie-ins of pipelines and utilities just as you would build out in the Permian. So no major capital project required for us to deliver the doubling of production in the next 5 years.

Got it. And then last one on Venezuela before we move on is the terms. So clearly, you have to negotiate with the government to get to the point in order to move forward to invest. But how do you -- how confident do you feel about the sustainability of the terms that you have and the ability to maintain these fiscal terms in the long run so that the asset can compete within the portfolio for a long time.

Yes. Well, the new terms obviously unlock the competitiveness, and that gives us the assurance to grow. But Venezuela took a large step when they implemented the hydrocarbon reform law. And what that did early in the year would provide and the opportunity then to negotiate on the terms, the terms that ultimately made the difference for us in terms of growing production and increasing investment. Terms such as royalty, terms such as taxes, think of it overall, how much is split between the government and the investor. And so through that negotiation, we were able to get to a very competitive place and the Venezuelan team and government was open to looking at the global benchmarks, and they realized that for investment to occur in their country, the investments have to compete for capital along with all of our options in our portfolio and all other options around the world. And so they worked with us actively and we've got to a great place where this is a win for Venezuela, and this is a win for the investor. And then overall, it to win for the U.S. in terms of energy security. So a win-win-win is how Mike described it. And I think it really points to that. But in addition to the new terms, there was a lot more to the announcement last week as well. We also got more provisions. Think of them as strengthening our legal provisions so that we have stability clauses in those contracts that protect the royalty and taxes and terms that we have negotiated. And so those protections will enable those terms to endure across administration. And in our business, we think about the long term. So we see administration change in this country and all around the world, and we have to ensure they endure these type of provisions that are as strong as what we have in other parts of the world, in this country to help protect that. And so that should give the investor assurance that are these investments are solid. In addition, we also got the right to international arbitration, which is a provision that we typically see in oil and gas contracts around the world. So those things really came together. The improved returns the strengthened legal provisions and then obviously, the competitive positioning of this large resource base in our portfolio. And those 3 things came together. That's what got us excited about leaning in.

No, that makes sense. And certainly, given it's Chevron would not be stepping in without checking all these boxes. So really look forward to how much this asset is going to contribute to the portfolio going forward. Now talking about the rest of the portfolio, the -- there's been a big balance sheet improvement since the Hess acquisition, while you guys continue to deliver buyback. As the balance sheet getting -- at the current state, given the much improved levels, how do you think about balancing the continued debt reduction and buyback going forward? And sort of how you think about the priority use on the free cash flow from hereon?

We use our long-standing financial priorities to guide all of those decisions. Those financial priorities have been around for decades. One is to grow the dividend; 2 is to invest capital efficiently; three is to strengthen the balance sheet; and four, is return excess cash to shareholders through buyback. So we always look at it with those priorities in mind. The first priority of the dividend is being set. So there's no change. We've already grown the dividend this year, and so that is consistent with the last 39 years. Our capital efficiency, we're funding all the projects to enable 7% to 10% growth in the portfolio. And so everything that we have put our -- in a plan, we are delivering on plan and we're growing. So there's no allocation for incremental investments. Venezuela obviously changes that, but that will be eventually affiliate capital because we'll change to equity accounting. Third is the balance sheet. And so the excess cash that we have been generating has been going to the balance sheet, and that's strengthening the balance sheet for the long term. And so that's where it's going like now. There's been so much volatility over the last few months. In fact, in the last months, we've seen oil prices move, I think, $35. And so we generally don't like to move the buyback rate during times of volatility. We like to have a better view of what -- where prices are trending and then we adjust. So we have a range, $10 billion to $20 billion, and we will be buying back shares consistent with that range. But ultimately, excess cash will go back to the shareholders. It's not a matter of if, it's a matter of when, when we've got a clear path on what the outlook on price looks like.

No, that makes sense. And that's what the range is for to predict the...

That flexibility.

Exactly. I want to shifting gear to the shale integration and the the really strong capital efficiency improvements that you have been able to deliver in the Permian. And you have guided to 25% lower CapEx intensity in '26 versus '25. So that's a big drop as you are getting to this maintenance free cash flow harvesting mode. So maybe talk about what's been the key drivers of efficiency in U.S. -- in onshore, the shale and type business. And what should we expect for investors going forward of what you can deliver on continuing efficiencies in U.S. shale.

The shale type business, we pulled all the assets together last year as part of our organization. They have -- find their sweet spot. They're learning from each other, implementing each other's best practices. And that's really what we're seeing in terms of the significant reduction in capital because they're all benefiting from the best of all of the assets. So the reorganization was a big trigger in terms of bringing all of that learning together at a fast pace. But Permian, for example, the Permian has been growing for the last 5 years. In 2019, we were producing about 450,000 barrels a day. We grew that to 1 million. And what we find as we have plateaued around 1 million, is that there's a different mode of operation. And it's a mode not of growth in production, but it's a mode of growth in free cash flow. And so every aspect of the factory is being interrogated with benchmarking with opportunities to take [indiscernible] to do things differently, and they're all benefiting from each other. I would say the main examples, I'd point to reliability. The reliability in the shale and tide asset class has never been as high as what we reported in the second quarter. That is benefiting from the learnings with all of the assets together. It's also benefiting from a real focus on base business, the blocking and tackling every day. So maintenance program, artificial lift optimization, real-time detection of anomalies, all of those base business blocking and tackling, lessons learned that we've gleaned from all the assets have been put into effect, and that's why we're seeing the highest reliability. We've also been able to improve drilling efficiency. I mean we thought we had improved drilling efficiency. We're seeing even more. And so we're drilling twice as fast as what we were drilling 2 years ago. So when you have these efficiencies every stage of the factory, results follow. We've also seen, as we've scaled up our technology programs that include chemicals and stimulation, we've also seen production uplift from those programs. So when you put them all together, we're getting more with less, and the reduction in CapEx has really been terrific. So the team had to find their sweet spot at 1 million barrels a day. And my expectation is they'll continue to find ways to take capital even further.