CVX
#Okay, good morning and thank you, Jonathan
Welcome to Chevron's first quarter earnings conference call and webcast
On the call with me today is Steve <UNK>, President, Chevron Asia-Pacific Exploration & Production company
Also joining us on the call is Frank Mount, General Manager of Investor Relations
We will refer to the slides that are available on Chevron's website
Before we get started, please be reminded that this presentation contains estimates, projections, and other forward-looking statements
We ask that you review the cautionary statement on slide 2. I'll begin with a discussion of first quarter 2017 results
Steve will provide an update on upstream activities, with an emphasis on the portfolio he leads in the Asia-Pacific region
Then I'll conclude with a recap of key messages from our March 2017 security analyst meeting
Turning to slide 3, an overview of our financial performance, the company's first quarter earnings were $2.7 billion or $1.41 per diluted share
Excluding foreign exchange and special items, as detailed in an appendix slide, earnings for the quarter totaled $2.3 billion or $1.23 per share
Cash from operations for the quarter was $3.9 billion and included about $1 billion in working capital consumption
Excluding working capital, cash flow from operations was $4.8 billion
At quarter end, debt balances stood at $45 billion, approximately $900 million lower than where we ended 2016. On a headline basis, this means a debt ratio of approximately 24%
On a net debt basis, our debt net of cash totaled $38 billion
Our debt ratio stood at approximately 20%
During the first quarter, we paid $2 billion in dividends
Earlier in the week, we announced a dividend of $1.08 per share payable to stockholders of record as of May 19. We currently yield 4%
Turning to slide 4, we intend to be cash balanced in 2017 at $50 Brent prices, and this slide demonstrates that we are nicely on our way to delivering that
First quarter 2017 net cash generation of $900 million incorporates the impacts of growing operating cash flow, reduced capital spend, and proceeds from asset sales
Operating cash flow reflects improved realizations and high-margin volume growth
Deferred tax effects were approximately $600 million, and affiliate earnings exceeded affiliate dividends by approximately $700 million
TCO did not pay a dividend during the first quarter
That is more likely a second half event
Additionally, working capital requirements consumed approximately $1 billion in the quarter
If you look back over several years, you will generally see a pattern of working capital consumption in the first quarter and often the second quarter resulting from the timing of tax and variable compensation payments as well as inventory build
The historical pattern also shows reversal in the second half of the year, and we expect that reversal pattern to hold again this year
Cash capital spend for the quarter was $3.3 billion, approximately $2.3 billion or 40% less than the first quarter of 2016. Reductions come mainly from finishing our major capital projects under construction, pacing and high-grading future investments, and realizing efficiency gains along with higher cost reductions
First quarter asset sale proceeds were $2.1 billion, primarily from the sale of our geothermal assets in Indonesia
Turning now to slide 5, here you see current quarter earnings compared against the same period last year
First quarter 2017 results were $3.4 billion higher than first quarter 2016 results
Special items, primarily a gain from the sale of our Indonesian geothermal assets, increased earnings by $795 million between periods
Upstream earnings excluding special items and foreign exchange increased $2.3 billion between periods
This reflected improved realizations, lower operating expenses, and increased volumes
Downstream earnings excluding special items and foreign exchange increased by approximately $80 million, mostly due to the swing in timing effects and lower operating expenses
The variance in the other segment was primarily from lower employee expenses and favorable corporate tax items
As we've indicated previously, our guidance for the other segment is $1.6 billion in annual net charges, so quarterly results are likely to be non-ratable
Turning to slide 6, I'll now compare results for the first quarter of 2017 with the fourth quarter of 2016. First quarter results were approximately $2.3 billion higher than the fourth quarter
Special items, mainly from a gain on the sale of geothermal assets in Indonesia, increased earnings between periods by $600 million, while foreign exchange impacts decreased earnings by $267 million between periods
Upstream results excluding special items and foreign exchange increased by $267 million between quarters, primarily reflecting higher realizations
Downstream earnings excluding special items and foreign exchange were higher by $668 million, reflecting the absence of the impacts of the fourth quarter Richmond refinery turnaround and a swing in timing effects
The variance in the other segment largely reflects lower corporate charges and a swing in corporate tax items between quarters
Turning to slide 7, this chart shows first quarter production growth of 82,000 barrels of oil equivalent per day or more than 3% from full-year 2016 levels
Startups and ramp-ups, primarily from Gorgon, Angola LNG, and Alder as well as growth in our Permian assets support accelerated production through the quarter
Base declines, the impact of production sharing and variable royalty contracts, along with the 2017 impact of asset sales consummated in 2016, reduced production
Looking forward to the remainder of 2017, we expect to see additional growth from Gorgon Train 3, the first train at Wheatstone, and Sonam
Additionally, we expect to see continued ramp-ups from other MCPs such as Mafumeira Sul and Moho Nord as well as growth in our Permian assets
Ultimate production growth for 2017 will be impacted by uncertainties, such as the timing and speed of MCP startups and ramp-ups, external events such as the Partition Zone restart, and base decline rates
Price and spend levels will also impact the amount of cost recovery barrels we receive
All said, we expect to comfortably be within the 4% to 9% growth range we provided earlier in the year, again before asset sales
Our current estimate for the impact of 2017 asset sales on production continues to be a reduction of 50,000 to 100,000 barrels of oil equivalent per day
Earlier this week, we announced an agreement to sell our assets in Bangladesh, which produced approximately 114,000 barrels of oil equivalent per day in 2016. The annualized impact of this and other asset sales will be dependent upon the timing of this close and of other individual transactions
And now Steve will walk us through some upstream updates
Okay, thanks, Steve
Now turning to slide 12, we continue to lower our cost structure and reduce our spend
The chart shows a steep reduction in quarterly average C&E since 2014. Year-to-date capital expenditures of $4.4 billion are down 22% compared to the average 2016 quarter and down 56% compared to the average 2014 quarter
We are trending below annual guidance
We previously communicated that our capital guidance range is $17 billion to $22 billion per year through 2020. If oil prices remain near the $50 per barrel mark, you can expect to see our future spend near the bottom of this range
Year-to-date operating expense is down almost 11% when compared to the average 2016 quarter and down 26% when compared to the average 2014 quarter
We have made substantial progress on lowering our cost structure, and we are striving to have the remaining quarters of 2017 broadly continue this pattern
Now on slide 13, we received approximately $2.1 billion in asset sale proceeds in the quarter, the vast majority of which related to the sale of our geothermal assets in Indonesia
Since the beginning of 2016, we've sold approximately $5 billion in assets, and thus have already achieved the lower band of our targeted two-year range
Also during the quarter, we signed sales and purchase agreements to sell our marketing and refining assets in British Columbia and Alberta as well as our downstream business in South Africa and Botswana
These in-progress transactions are subject to regulatory reviews prior to closing, hopefully later this year
Additionally, we announced an agreement to sell our upstream assets in Bangladesh, a business where gas production is sold into the domestic market at a fixed price
Turning now to slide 14, I'd like to close by reiterating our messages from our recent security analyst meeting
Our financial priorities are clear and consistent
Our number one priority is to maintain and grow the dividend as earnings and cash flow permit
To do that, we're focused on three areas
First, we are taking actions that should enable us to be cash balanced in 2017. We intend to continue to grow free cash flow thereafter
The first quarter was a good start
Second, we are focused on improving returns
This will happen as projects are completed and revenue is realized from growing production volume
It will happen as we shift our capital program
75% of our spend is expected to generate cash within two years, and it will be aided by ongoing reductions in operating expenses and improvements in how we manage our major capital projects
Third, we're focused on unlocking value from our entire portfolio
Our portfolio is anchored by legacy positions and advantaged by assets that are early in life
This gives us the opportunity to realize efficiency, reliability, and debottlenecking gains with short-cycle high-return capital investments
So that concludes our prepared remarks, and we're now ready to take your questions
Please keep in mind that we do have a full queue, so please try to limit yourself to one question and one follow-up if necessary
We'll certainly do our best to get all of your questions answered
Jonathan, please go ahead and open up the lines for questions
Question-and-Answer Session
So, <UNK>, I'm going to go ahead and take that one, and I guess I want to start with expressing our huge disappointment in the ruling
I want to make it clear to everybody though that the courts affirmed that the financing arrangements that we had in place are legal
And so the issue that is being litigated here is the appropriate interest rate for a loan between our corporate group and our Chevron Australia subsidiary
I would say that the court ruling deviates substantially from recognized international transfer pricing guidelines
And in those guidelines, the courts are to treat related parties to a transaction as if they were standalone separate legal entities
And the Australian appellate court really failed to do this, so in other words they were making no distinction between the creditworthiness of the Chevron Corporation as an entity versus Chevron Australia as an entity, and therefore no distinction on the relative borrowing costs between those entities
I'd say that there's an awful lot at stake with this ruling, not just for Chevron but for any intercompany lending in Australia and more broadly around the globe, because it fundamentally changes established transfer pricing guidelines and principles
So if the ruling stands, it certainly going to affect any future investment in Australia
And I would say going forward and thinking about it specific to the Chevron case, we're obviously evaluating the decision
Now the decision just came out a week ago
It's a fairly lengthy decision, and we're reviewing our options
Those options include going forward with an appeal to the High Court of Australia as well as continuing on with discussions with the ATO on possible settlements and any other reasonable resolution to the dispute
Actually, <UNK>, what happened was that in 2016, we and Exxon made co-loans into the joint venture
There was also a third-party borrowing
And a summation of that, when you looked at the amount of funds that came into the enterprise relative to the amount of investment that was going to be required on the capital project, there were sufficient funds projected out for 2017 where there would not be another co-lending requirement needed for 2017. As you look forward in 2018 and if you assume a $50-ish scenario, there will more likely than not be co-loans going on in 2018 – 2019. Somewhere in the $2 billion to $3 billion-ish range is our requirement for total affiliate spending over this period of time
So what we were saying is that because there was an advance funding of capital requirements in 2016, we didn't see that we would need to co-lend again in 2017. We do anticipate that there will be a dividend receipt in the second half of this year for us
That's exactly right, that's exactly right
And going forward, there will be obviously a lot of planning around what is the pace of spending on the project, what's happening to oil prices, what's the internal cash generation at TCO, et cetera
I think what we were trying to do in addition to PZ, PZ is a significant component there, but we're also trying to say that even – what people capture in their mind is the 4% to 9%, and they forget the pricing premise that was used for it
And so yes, there are price sensitivities built into that range that influence cost recovery barrels and the like
Also, the investment levels going forward influence the cost recovery barrels as well
So we were just trying to be as descriptive as we possibly could be in naming the things that could either work to the upside or work to the downside
If we continue on with first quarter results into second quarter and third quarter results, I would agree with you
Good morning
I think that we are trending lower than a ratable amount would give you relative to our $19.8 billion target for this year
The affiliate spending was a little bit lower than ratable
And I think as you go through the year, there will be spending by TCO in particular that should pick up as the remaining three quarters get underway
Other than that, I would just speak to capital efficiency
I think we are getting much more output – much greater activity for a given dollar spend than we were anticipating
So coming in at the lower end of – coming in below the $19.8 billion could very well be where we end up for the year
Yes, it's my favorite topic
Actually, all I would say is that the corporate sector can be really quite volatile
It does include certain corporate expenses, for example, related to employees
I mentioned last quarter, if you'll recall, about pension settlement costs
That's a factor that goes on in here
But more impactful typically would be corporate consolidated tax entries, and those are just very hard for us to predict
They're not necessarily ratable, and that's really what you see going on here in this particular quarter
I would just again ask you to go back and think about the full year and use the $1.6 billion net charge for that sector for us in your predictions
That's the best information that I have, and it will be not ratable
Right
So I don't think it's an either/or circumstance
We do want to come in between the $5 billion to $10 billion, but we also are very focused on improving the portfolio and high-grading the portfolio
So we put this target out a year and a half ago or so now, and we're in the second half of the time period in executing it
I think it's still a good target for us this year, but we will continue to look at the portfolio and continue to see if there are assets that again, either aren't strategic or not closely strategic, whether there's value that others see in it that's greater than ours or that won't attract capital in our capital allocation process
Canada, it's a good asset for us
It's a cash generator for us
We're obviously aware of – you're talking about oil sands
I'm talking about oil sands at least
We're aware of the transactions that have occurred in this space over the last few weeks
All I would say is that if we were to transact, we'd want to make sure we got good value for it
Really I hate to – <UNK>, I hate to go off of guidance we gave just four weeks ago or so
It clearly is in our quiver here
We are obviously very much evaluating it
We're seeing great efficiency in terms of what we get per dollar spent
All of the production and operating cost improvements that we noted before continue to happen
So we very well may be able to capture much greater activity and therefore much greater volume per dollar spent
So we'll continue to look at this
We understand the – we have the same desire that our shareholders have, which is monetizing that asset as best we can, and this is certainly one avenue for doing that
I would say from a Gorgon standpoint, a reasonable number to have in your mind is a couple billion dollars
And of course, Wheatstone is just going to be ramping up, so I wouldn't expect a significant contribution there
I don't think I want to give a number there necessarily
There are still capital expenditures that are being incurred
And so if you look at it including capital expenditures, the answer on that would obviously be yes
It's probably a net drain on us
For 2016 (36:35)
I would just say within upstream, I think there is fine-tuning as the year progresses about where capital opportunities are being generated – additional spending opportunities are being generated
Obviously, the Permian is going to be one of the first places to draw additional capital, but there are other short-cycle investments, for example, in Thailand and also in San Joaquin that would also be attractive as well
So that is a routine optimization that goes on within the upstream leadership team – I won't say on a monthly basis, but obviously they continue to monitor that as the year progresses
I did phrase it for lowering it
I'm sorry
I meant
Okay
Let me just – I'll take PZ first
I can say that negotiations and discussions are underway still
They're still occurring between the parties of the government
I really can't go out on a limb and predict when the resolution might occur
We're going on two years now where this has been an issue
I will say that the longer this goes on, the more challenging it is to get the equipment back up and running
We do continue to reduce operating expenses in PZ and continue to let people leave the payroll because we need to limit the losses that are occurring here
So I don't have any fresh news about when we might expect that restart, unfortunately
In Venezuela, I would just say it's a very tough circumstance for all of the people of Venezuela
We haven't had any or significant – it's really been minimal impact to our operations and our facilities
Priority number one for us is keeping our people safe, and so we're operating with that intention in mind
And Nigeria just continues to be a challenging location as well
There has been some disruption to production facilities in the first quarter of the year
We continue to monitor for safety there as well
So I would say just general in terms of inflationary pressures, the only place around the globe really that we are seeing inflationary pressures of any size would be in the Permian, and that's obviously being driven by activity levels in the Permian
And within the Permian, obviously we're working very hard to restrict that through our contracting strategy in terms of fixed-price contracts, indexed contracts, staggered contract terms, performance contracts, et cetera
Overall, we think that will be manageable for us, relatively small impact in 2017. And then outside the Permian, we really just haven't seen inflationary pressures
So I think in general, that's why I said that we intend – we're certainly striving to have a continued downward trend on operating expense in the remaining three quarters of the year, acknowledging that we will be bringing on additional production, and that will be an element going in the other direction
Okay, yes
So, <UNK>, I would say on the NOJV [Non-Operated Joint Venture] issue, I don't really have any significant information that would suggest the NOJV plan is any different than we had outlined
Currently, we've got 13 gross NOJV rigs, so that's five net
And I see that – I think in our plan as we look forward, there was ramping up some, but I don't have any new information relative to that
And with regard to the realizations, there's nothing unusual there in terms of one-offs on realizations
It really is just as a function of WTI prices, San Joaquin Valley prices, Mars prices, et cetera, and how those move relative to one another
So I would say in general, I think that's a good premise for you
If you look back over time, our first quarter tends to be typically our lowest cash generation quarter, and part of it is driven by the working capital
I did indicate that we saw a portion of that working capital most likely reversing between the end of this quarter and the end of the year, so I don't think you will get the same kind of penalty there per quarter
I'd also say – I mentioned the dividends, a potential coming in from TCO in the second half of the year, so that would be a positive in the remaining quarters of the year
If you go back to what I said back in March, one of the questions I had was about all of the summation of all of these "headwinds", and I had given an indication then of them being about $4 billion, a little bit over $4 billion for the year
And I still think that is a good element to think about when you consider the deferred tax impact, the working capital impact, and the difference between affiliate dividend and dividend earnings during the period
So all said, when you put that all together, I know there was a lot of numbers there
I do think the second part of the year we'll have stronger cash generation, not only from these reasons that I'm talking about, but production increases and the fact that these are high cash margin barrels that we're bringing on
It would, it would
It's a good question
I think the best place that I would go because where we're seeing it in action is in TCO because this is the most significant capital project that we have underway at this point in time of a longer duration
And so we've talked about the fact that we were increasing the overall engineering that was done before we began to essentially cut steel
We've now started fabrication in Korea and the Kazakhstani yards
We're monitoring – we've done more in terms of design assurance there on that project, optimizing contracting strategy, taking advantage of the lower-cost environment
So I really think the benchmark in terms of how this will turn out in terms of all of these elements that Jay [Pryor] and John have talked about before in terms of major capital project execution, the benchmark on how we're doing will be with regard to TCO and how well it is coming forward
And right now, the overall progress, we're on track with elements of fabrication and construction of the port and we're underway with constructing the village, the housing village, et cetera, and the drilling is going very well
So all of those efforts are really being focused in real time on the TCO project
That's a no comment at this point, so thank you very much for giving me that third option
Yeah, so I'm just going to go back and reiterate what our priorities have long been
The first priority is going to be given to growing the dividend when we feel cash flow and earnings can support it for the long term, and by that I mean in perpetuity
Secondly, we look at future additional investment opportunities that we've got because we do need to continue to grow future revenue streams
And then we look at the balance sheet
It is important for us to continue to have a strong balance sheet
And what you saw in this quarter is really a flex in our commercial paper program, and that's part of why we have a commercial paper program is to take flex like this
So all of those are important to us
We do balance that
We're at a 24% debt ratio, which is an okay place to be, I would say
But over time, I'd like to see us move a little bit lower in the debt profile when cash flow permits us to do that
Maintaining a AA is important to us
We did just meet with the rating agencies
We did just get affirmed by Moody's as a AA stable
We haven't heard from S&P yet, but it's an important element for us
Okay, I think we've got time for one more question
Yes, so I'll take PZ first
I don't want to get into describing what our ongoing operating costs are here when we've got an asset that is not operating
I will just say that when it does come back online, these cumulative losses will be taken into account in terms of the eventual recovery, tax recovery that's available to us
In terms of cash tax, this is a hard area for us to forecast at this particular time because of just issues that I've explained before about tax loss carryforwards and the fact that we've got different jurisdictions with different circumstances as their current tax position standpoint
I would say in general, we do still have some jurisdictions at current prices that are generating tax losses
And so that means that these tax losses will be carried forward into future periods
And when oil prices rise from $50 to $60 to $70, if you assume that hypothesis, we do need higher prices here to recover some of those previously deferred or those tax losses that have been carried forward that cannot then be carried back and will become a cash benefit, a relative cash benefit in future periods
That's really the best guidance that I can give you at this point in time
At low prices, there is not a lot of – we do have cash taxes in some locations, but it is not in all locations
I don't have it handy here
It's something I can consider for future disclosures
Okay, I think that concludes our call for this morning
I want to thank everybody for your time today, and we certainly appreciate your interest in Chevron and your participation on the call
