Please standby. We're about to begin. Good morning. My name is Katie, and I will be your conference facilitator today. Welcome to Chevron's Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ remarks, there will be a question-and-answer session and instructions will be given at that time. As a reminder, this conference call is being recorded. I will now turn the conference over to the General Manager of Investor Relations of Chevron Corporation, Mr. Roderick Green. Please go ahead.

Thank you, Katie. Welcome to Chevron's third quarter earnings conference call. I'm Roderick Green, GM of Investor Relations. And on the call with me today are Mark Nelson, EVP of Downstream and Chemicals; and Pierre Breber, CFO. We will refer to the slides and prepared remarks 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. Please review the cautionary statement on Slide 2. Now, I will turn it over to Pierre.

Thanks, Roderick. We reported third quarter earnings of $6.1 billion or $3.19 per share, the highest reported earnings in more than eight years. Adjusted earnings were $5.7 billion or $2.96 per share. The quarter's results included two special items: asset sale gains of $200 million and pension settlement costs of $81 million. A reconciliation of non-GAAP measures can be found in the appendix to this presentation. Adjusted ROCE was greater than 13% and we lowered our net debt ratio to below 19%. Strong operating cash flow enabled us to deliver on our financial priorities, including the resumption of share repurchases. Compared to before COVID, operating costs are down, upstream production is up, and we're much more capital efficient. Cost efficiency and capital efficiency are essential to navigate commodity price cycles. Providing resilience through the low periods and leveraging upside when markets are strong. This has been evident over the past several quarters, and especially so in the most recent one, as we generated Company record free cash flow higher than the strongest quarters in 2008 and 2011 when oil prices were well over $100 a barrel. Adjusted third quarter earnings were up more than $5 billion versus last year, primarily on higher prices, margins, and volumes. Compared with last quarter, adjusted third quarter earnings were up almost $2.5 billion. Adjusted Upstream earnings increased on higher realizations and positive timing effects primarily related to managing LNG portfolio pricing exposure. Adjusted Downstream earnings increased primarily on higher refining and marketing margins. The all other variance was positive due to lower corporate charges and the use of deferred tax assets, which previously had a valuation allowance. Third quarter oil equivalent production increased 7% year-over-year due to the Noble acquisition and lower curtailments, partly offset by price-related entitlement effects and asset sales. I'll now pass it over to Mark.

Thanks, Pierre. In downstream and chemicals, we delivered our best adjusted earnings in more than four years. Demand for our product is strong, with recovery of jet fuel sales expected as international travel gradually returns. And while the improving market environment helps, we're focused on what we can control: safe and reliable operations, capital and cost efficiency, and value chain optimization, to drive higher returns. Some examples of our self-help actions include: using digital tools to improve planning, scheduling, and prioritization of maintenance activity, leveraging data analytics and asset flexibility to increase margins, and adopting new technology like robotic inspection in maintenance procedures. During our Investor Day in March, I highlighted that self-help is expected to drive higher returns for Downstream and Chemicals. We're on track to meet that guidance with benefits already flowing to the bottom line. Chemicals performance is also strong, as CPChem responds to current market conditions while continuing to keep a focus on longer-term unit cost reduction. GS Caltex reached 100% design capacity of its mixed feed cracker ahead of schedule and under budget. The CPChem U.S. Gulf Coast II Project continues to advance towards a final investment decision in a disciplined way that positions the project to earn attractive returns through the cycle. And the Ras Laffan Project is in FEED, and we continue to evaluate this project. We believe in the long-term fundamentals of chemicals, our investment focus continues to be on the low end of the supply cost curve, advantage feedstock, competitive capital and cost structure, and strong project execution. Since our energy transition spotlight, we closed the acquisition of an equity interest in American natural gas and its network of 60 CNG retail sites with our partner, Mercuria, enabling us to meet customers’ needs beyond California. We're also delivering first gas through our Brightmark partnership and all CalBioGas farms are now online. We sold the first sustainable aviation fuel produced from our El Segundo Refinery to Delta Airlines at LAX. And earlier this month, we announced an agreement to acquire Neste's Group 3 base oil business and its next base brand. Pending regulatory approval, we anticipate closing in the first quarter of 2022. The acquisition is expected to provide a capital efficient approach to expand our base oil offerings. And coupled with Novvi's renewable products, it positions Chevron to be the supplier of choice to meet customers' needs now and into the future. Back to you, Pierre.

Thanks, Mark. We recently released an updated climate change resilience report, which includes stress tests and portfolio under IEA's Net Zero 2050 scenario. A new target called portfolio carbon intensity, that includes Scope 1 and 2 and Scope 3 emissions from the use of our products and Chevron's Net Zero 2050 aspiration for Upstream Scope 1 and 2 emissions. I encourage everyone to read our latest report available on our website. Now looking ahead. In the fourth quarter, we expect lower production due to a planned turnaround at Wheatstone, which was completed last week, and repairs at the Alba gas plant and Equatorial Guinea. In addition, our participation in Rokan PSC in Indonesia ended in August. Production from Rokan averaged 84,000 barrels of oil equivalent year-to-date. We expect earnings from JKM-related spot sales out of Australia to increase around $50 million from third quarter, due to fewer spot cargoes as our long-term customers increased deliveries heading into winter. We're also expecting three discrete cash items, the return of capital from Angola LNG, TCO's first dividend in several years, and a federal income tax cash refund. There are no P&L impacts from these items. During 4Q, we expect to buy back shares at the high end of our guidance range. Finally, we're lowering our full-year C&E guidance to $12 billion to $13 billion, primarily due to COVID-related project spend deferrals into next year, lower non-op CapEx in the Permian, and continued capital efficiencies. To wrap up the quarter, we continue to make progress towards our objective of higher returns and lower carbon. We're more capital and cost efficient, generated record free cash flow, and are taking actions to lower the carbon intensity of our operations and grow lower-carbon businesses. We're executing a straightforward strategy that's expected to deliver value now and well into the future. With that, I will turn it back over to Roderick.

That concludes our prepared remarks. We are now ready to take your questions. Please try to limit yourself to one question and one follow-up. We will do our best to get to all your questions. Please open up the lines, Katie.

Thank you. Our first question comes from Devin McDermott with Morgan Stanley.

Good morning. Congrats on the great results. So my first question, Pierre, I think is for you. I just wanted to ask for a little bit more detail on the reduction in the capital spending guidance for this year. It sounds like it's a mix of different factors. Some of it's deferrals next year, some of it's a mix of non-op and efficiency gains. Can you just bridge the delta a little bit more detail for us and also talk about whether or not these deferrals or how these deferrals impact planned 2022 spend?

Thanks, Devin. We lowered our CapEx guidance to $12 billion to $13 billion. That's from our budget of $14 billion and from our revised guidance that we had in the second quarter of $13 billion. So in the last quarter, what's changed? While we continue to see non-op spend in the Permian below our expectations, we did have some deferred major capital project spending tied to Hurricane Ida and the Delta variant wave. And then we've continued to see capital efficiency across the Permian and across the portfolio. It does not change our CapEx guidance for next year and through 2025, which is $15 billion to $17 billion. We do expect higher CapEx in the fourth quarter and next year. The low end of that range is about a 20% increase from the midpoint of our revised guidance. So these deferrals are very manageable. And again, I would think from the original $14 billion budget, about half, you can think of as a deferral and half I would say is capital efficiency and cost-savings, which means getting the same results for less capital.

Got it. Makes a lot of sense. And then my follow-up is on cash returns. So very strong free cash flow in the quarter. Your debt target is now below the bottom end of your target range. It's good to see the increase in the cadence of the buyback in 4Q, I guess my question is, what are some of the things you're looking for to further increase that buyback target back to something closer to the pre-COVID run rate?

As you said, Devin, our guidance for fourth quarter is at the high end of the range, so that's a $3 billion annual rate or $750 million in the quarter. And as I said last quarter, and I'll restate now, we'll increase the buyback range when Chevron's net debt ratio was comfortably below 20%. We ended the third quarter with a net debt ratio a little bit under 19%, down from 21% at the end of the second quarter. So we just got below 20%, but we're fast approaching a net debt level where we could increase the buyback range further. As a reminder, Devin, I know you know this, we intend to maintain our buyback for multiple years through the cycle. And so we're positioning our balance sheet below our mid-cycle range, so that will enable us to continue buybacks even if the cycle turns.

Got it. Very helpful, makes sense. Congrats again on the strong quarter.

Thanks, Devin.

We'll take our next question from Neil Mehta with Goldman Sachs.

Yes, I just want to echo great results here. Pierre, I want you to take a moment to talk about the global gas market. You spend a lot of time looking at this over the years. How do you see it playing out from here? And there are a lot of moving pieces as it relates to your gas portfolio. But one would be just any thoughts around spot cargoes and the other would be it looked like you had some timing effects in the quarter that supported earnings. I would think that would unwind later on, but just any modeling advice there. So a lot of moving pieces there, but your thoughts on the cash portfolio.

Thanks, Neil. First, I'd say that we are seeing high gas prices. It does feel more cyclical than structural. We've seen demand very resilient through COVID on natural gas, in particular, and supply has been impacted in part by lower associated gas, just a slowdown in some supply activities. So seeing demand and supply a little bit out, I don't think it's something that we've seen in the past, and we expect that markets will work. We're seeing commodity pricing right now, and we expect markets to rebalance over time. We have a very strong natural gas business. We have a nice position in North America, Australia, Eastern Med through Noble Energy, and in Africa. And so we're well-positioned there. There's not much in the short term that we can really do to increase supply. We have a position in the Haynesville and we could increase activity there. But that will have a modest impact on a Company of our size. I think over the medium to longer term, we're working on expansion opportunities, particularly in Eastern Med, and I think this is positive for signing up customers and enabling kind of the next phase of expansion there. So it's something that we're certainly well-positioned for and we're looking to expand supply into it. In terms of the quarter, a couple of things. Yes, we did have a trading timing effect that was related to LNG. And that's really tied to how we manage our overall portfolio pricing, so we have customer contracts that are oil-linked and JKM linked, and then we have various supplies and we try to match up the pricing. And in order to do that, we essentially went long with some JKM paper, which clearly was mark-to-market positive in the quarter. Now, that's going to be matched against some physical deliveries in future quarters. So we call that timing because we expect to see that unwind when those physical cargoes are delivered. And then the last piece of guidance we had was really on fourth quarter earnings effects. We guided towards $50 million of increased earnings in 4Q versus 3Q from Australia LNG spot cargoes. That’s just to make the point that we are going to have spot cargoes. We have all five trains operating, the Wheatstone plant turnaround is complete. And we'll have actually more cargoes delivered in fourth quarter when you think of contract and spot. But because it's heading into winter and many of our customers in the Northern Hemisphere, their nomination seasonally picks up heading into the winter. And so they will have higher takes under the long-term contracts, which are oil-linked. And that means we will have fewer cargoes getting the higher JKM prices. So higher prices clearly in JKM, 4Q versus 3Q, fewer cargoes, that's a net benefit of about $50 million. We also have some exposure out of our both Angola LNG and Equatorial Guinea, and so you can think about another $50 million or so from spot cargoes from those operations. So, sorry it's a long answer to cover the full breadth of natural gas this quarter.

There are many factors at play. Pierre, you're performing well on capital expenditures this year, which started at $14 billion, was revised to $13 billion, and now appears to be as low as $12 billion. For next year, if I recall correctly, the capital expenditure range is $15 to $17 billion. Is it reasonable to conclude that the reduced spending this year suggests you'd likely be at the lower end of that range? Are there any other factors we should consider as you prepare for the spending level in 2022?

You will see us increase capital in the fourth quarter just to get to that $12 billion to $13 billion because we're at $8.1 billion through third quarter. And you'll see that in the Permian, with two more rigs and two more completion crews. We'll have higher activity levels at Tengiz. We're going to maintain peak manpower through the winter. And then activity tends to be back-loaded, so we have some project milestone payments, and we have exploration wells that we’ll be drilling in the fourth quarter. So you'll see an increase in fourth quarter. I think we will announce our 2022 budget in December like we normally do. It'll be within the guidance and I think it's fair to say it will be towards the low end of the guidance. Again, even being at the bottom of the guidance of $15 billion of organic capital, that's at least a 20% increase off the midpoint of the guidance we just gave for this year. So, again, I don't want to get ahead of that, but you should expect to see capital in the lower end of that guidance range.

Good stuff. Thanks, guys.

Thank you. We'll take our next question from Doug Leggate with Bank of America.

Well, thanks. Good morning, everybody.

Good morning.

Pierre and Mark, thanks for taking my questions. Pierre, I hate to ask a housekeeping question, but you've got to help me out here a little bit on tax. The way I'm thinking about this is that there's been a lot of changes and post-Noble. Your mix has changed and obviously we've got a lot more profitability in the U.S. with overall tax rates. So can you help me? Is what's going on the tax sustainable or is there a mix issue or is there something unusual going on because as we saw your tax rate going up? I'm worried that we are carrying too high a tax rate going forward.

The tax benefits in the third quarter which we cited are real. So this is a deferred tax asset. It was acquired through Noble. At the time of closing the transaction, we put a valuation allowance against it because these tax attributes expire after a certain number of years, and based on projections of financial performance at that time, we thought they would expire without us being able to use them. Our financial performance is so much stronger that we actually were able to use them in the third quarter. So that reduces our taxes both on an earnings and on a cash basis. So it's very real and it's an additional synergy from Noble and it's not something that was included in our synergy estimates. That is not something that necessarily will recur, we'll do a review of all of our tax attributes at year-end, and see again what deferred tax assets could have value going forward based on a change in condition. But, again, I would cite that, that was in the all other segment. It's not something that you would expect to recur.

That's really helpful, thanks. And then I suppose I can push you to quantify what our Noble contribution was, right?

Well, it's the primary variance in that segment. So we talked about lower corporate charges and tax benefits.

All right. My follow-up is really on balance sheet issue, but obviously going back 5 years ago, you guys faced net debt as this is leaving a lot of projects going quiet back then. When you think about the cost of debt, which is obviously very, very low, and we'll see if it stays there, versus the way you think about per-share dividend growth. So I'm trying to think, Exxon talks now about 20% to 25% has been the right level for them. Excuse me, your head around below that kind of level so what is the right level for you, given that you can obviously refinance at a very economic level and obviously step up for buybacks, if you chose to.

When I became CFO, I mentioned that we didn't set a strict target for our net debt ratio, but aiming for 20% to 25% is reasonable throughout the economic cycle. There may be instances where we exceed this range. For instance, during our stress test last year, which was unique in the industry, we demonstrated our ability to sustain the dividend even when our net debt ratio went above 25%. We no longer need to reach the levels of zero net debt that we had previously. However, when market conditions are favorable, we aim to remain below the lower end of that range, which we currently do, as we are below 19% and nearing a point where we could consider increasing our buyback guidance. Under current conditions, we anticipate generating significant excess cash, which we projected at $25 billion over five years at $60 per barrel, far below current prices. This surplus cash, beyond our capital expenditures and dividends, will be returned to shareholders over time through an increasing dividend. Our dividend has risen by 12% since before COVID, marking the largest increase in our sector. We also plan to maintain a consistent buyback rate, having repurchased shares in 14 of the last 18 years. Our intention is to uphold this buyback program even as market conditions shift, which may involve using debt temporarily, while still managing to stay within our target range as we continue to repurchase shares.

Let's hope that's not anytime soon because last year, we still got scars from last year. Thanks so much for your answers. I appreciate it.

Thank you, Doug.

We'll take our next question from Jeanine Wai with Barclays.

Hi. Good morning, everyone. Thanks for taking our questions.

Morning, Wai.

Good morning. We wanted to follow up on Devin's question and I guess Dave's question as well, getting back to the buyback. Pierre, you have already commented that you plan to maintain the buyback through multiple years through the price cycle, which is great. I think we remember prior commentary that the goal is to not have to reduce the buyback once it's started. So we wanted to just check in on that and how you think that the trajectory of any buyback increases. It sounds more ratable versus opportunistic. We know there's a tremendous amount of free cash flow coming your way, but also it seems like investor expectations are running alongside that versus being more ratable, and that the strip is backwardated. So we just wanted to check on the trajectory.

Thanks, Jeanine. Historically, we have never concluded a buyback program at the initial rate we started; instead, we tend to increase them. You may be correct that we haven't reduced them either. I'm not against that idea. We operate within a range, and we were in the middle of that range in the third quarter. This is the first quarter since we resumed buybacks. We bought back shares in the first quarter of last year, before COVID. Currently, we're at the top of the range, and as I mentioned, we're close to a net debt level where we can expand that guidance range further. Our focus is on being consistent and maintaining that through various market cycles. Our investors, our shareholders, have differing views on buybacks, but we generally agree on the importance of being consistent and executing buybacks through both favorable and challenging times. Therefore, we're setting our rates at a level we are confident we can sustain throughout the commodity price cycles.

Okay. Great, thank you for that. Our second question is really on the Permian and the outlook on capital allocation. Can you just talk a little bit about what you're seeing on inventory and supply demand, and maybe how close you are to potentially accelerating in the Permian, a little bit beyond what you've already laid out? And I guess on that, we know that it doesn't get much attention, but could you also be thinking about increasing activity in other short-cycle plays? Thank you.

We're going to increase capital in the fourth quarter and into next year. And so that'll be in the Permian and there will be in other locations. Again, as I said, even the bottom end of our guidance range of $15 billion represents at least a 20% increase from where we expect to end up this year. And we're seeing that in the fourth quarter. We'll see two additional rigs in Permian, two additional completion crews. We are beginning to see a non-op pick up, also, again, that's part of the reason why we lowered our guidance. Non-op has been a bit below our expectations. You can see it in other basins. We have a great portfolio with a number of short-cycle investments, but we're not changing our overall CapEx guidance range. Our CapEx guidance anticipated that we would be in a recovery mode and it would increase over time. We showed a five-year outlook on the Permian that shows that we can grow production as an outcome of a very capital efficient and carbon-efficient development of resource that we can grow that production from 600,000 barrels a day to 1 million barrels a day. So we're executing our plan. There's really no change in what we're doing. It's playing out the way we expected. And seeing a buildup in activity in the Permian and across other parts of our portfolio is what we had planned to do and we're going to do that in a very capital and cost-efficient way.

Great, thank you.

Thank you. We'll take our next question from Phil Gresh with JPMorgan.

Hey, Pierre. First question here, just kind of circling around the capital allocation piece a little bit more. Back in March, you talked about having $25 billion of excess cash or greater than $25 billion in excess cash over 5 years at $60, implicitly suggesting the dividend would be covered around $50-ish brands I believe. I'm just curious if as you progress through this year, the performance that you've seen, etc., has anything changed with that, to make you think that that break-even would be moving lower, or is that still an area where you're comfortable with?

That's an area where we feel confident. It's essentially about maintaining constant oil prices. We're seeing strong performance from Mark Nelson's Downstream & Chemicals Group. We have mentioned that natural gas pricing is robust in North America, Europe, and international LNG markets. Those factors are not static. If you examine this quarter's results, our break-even would be slightly lower, but for mid-cycle expectations regarding refining margins, chemical margins, natural gas prices, and an oil break-even around $50, that remains accurate. Of course, this will change as our dividend increases and other factors evolve over time, as it's a dividend break-even that also accounts for our capital and dividend needs. However, that calculation remains solid. We are in a better position than we were a few years ago. We demonstrated that our costs are down, production is up, and we are much more efficient with our capital. We can sustain and grow this business with less capital, which in turn enables us to deliver higher returns and reduce carbon emissions.

Got it. And then just a follow-up question on Wheatstone, there were some reports from your partners about reserves being written down there. I just wanted to get your commentary, how do you think about this? Does that mean something in terms of future capital requirements, given that it's a longer cycle project as any commentary you'd have there? Thanks.

It's unrelated to Chevron. The Wheatstone Project was the first in Australia, and possibly the world, to have third-party resources coming from two different joint ventures, originally Apache and now Woodside. Woodside has announced that the fields supplying their part of Wheatstone have experienced a write-down of reserves. Chevron does not hold any interest in those reserves, so the fields supplying Wheatstone are unaffected. Again, this is not related to Chevron's activities. Wheatstone is performing well. We completed a planned turnaround that affected part of the third quarter and early fourth quarter last week. We anticipate all five of our Australia trains to be operational this quarter, and we expect an increase in cargoes. While there is a strong focus on JKM, our oil-linked contract prices will also rise because they adjust with higher oil prices, typically on a three-to-six-month lag.

Great, thanks for the clarification there.

Thanks, Phil.

We will take our next question from Ryan Todd with Piper Sandler.

Thanks for your question. Following your recent energy transition event, you mentioned that nearly 10% of the capital budget is allocated to local run businesses. One of your peers in the U.S. has increased theirs to a comparable level. Considering the feedback you’ve received since then, it seems you view this as a reasonable compromise between investing in low-carbon ventures and maintaining returns. Do you believe that maintaining 10% is sufficient based on the feedback from the last couple of months, or do you anticipate growing pressure to raise that percentage in the future?

I'll start and then I'll ask Mark to talk a little bit about some of our renewable fuels activities in his portfolio. We have good shareholder support in alignment for our strategy and objectives of high returns and lower carbon. That's both lowering the carbon intensity of our traditional operations and then growing low-carbon businesses that leverage our strengths, our capabilities, assets, and customer relationships. And they target the sectors that cannot be easily electrified, the hard-to-abate sector. So this is things like air travel, industrial emissions, heavy-duty transport. The $10 billion of capital is connected to some pretty ambitious targets that go up to 2030. So 150,000 tons per annum of hydrogen, 25 million tons per year of carbon capture and storage. That's all consistent with that capital guidance. So we are more in the execution mode and getting it done versus, let's say competing on CapEx targets. It's not easy to do, these are ambitious targets. They have challenges and lots of opportunities, but let me ask Mark to talk a bit about his portion of that on renewable fuels.

Thanks for the question, Ryan. I could use a real tangible example. You think about our El Segundo Refinery in our diesel hydrotreater conversion. We've said a few things are really important to us when it comes to renewable diesel. We've said that the ability to sell it at the appropriate margin, the ability to have the right kind of feedstocks, and the ability to be capital efficient is critical for us to be successful. In Southern California, in the El Segundo Refinery are an example of all of that. We've already increased our sales; we're getting close to 40%, let's say over 30% of renewable and biodiesel in Southern California. We have our Bungie joint venture, where we're working towards definitive agreements as we speak, and yet they're already supplying us at the El Segundo Refinery. And finally, and perhaps most importantly, capital efficiency. We indicated in our energy transition spotlight that we expect to be a leader in the capital conversion of particular hydroprocessing units in our system. We believe we can do that for less than a dollar per gallon of annual capacity. And that's including any pretreatment requirements, that gives us the ability to produce both renewable diesel and conventional diesel just with a catalyst change, if that's necessary. So when you step back and you think about that work that's been done initially at El Segundo where we did our co-processing investment for very little money, we were able to test tanking and piping and metallurgy needs, and now we're working towards a full conversion of that diesel hydrotreater here by the end of next year. That won’t be easy, but the team is working really hard on it, making very good progress and that would be a 100% renewable diesel capacity and over 10,000 barrels a day. Thanks for the question, Ryan.

Great. Thanks, Mark, maybe a follow-up on some of your comments earlier, Pierre, where you mentioned when you were talking about the gas market and you mentioned the Eastern Med opportunities. You haven't talked about that much in a little while. In your conversations with potential buyers of that gas in the base, and I mean, in the past, when it was operated by Noble, there was talk of everything between European targets to pipelines to Egypt, to floating LNG, and all sorts of opportunities. Any thoughts on what may look like it makes the most sense there in the Eastern Med and opportunities for whether it's shorter-term de-bottlenecking and an opportunity there versus longer-term project development?

All options are still on the table, Ryan, and it's commercially sensitive, so I don't want to show our hand in any way. I mean, the point is that this is a great resource. There are some very low-cost expansions that can be done, and there's some larger expansions that can be done over time. What's really changed is that this was in a geography that a year ago looked oversupplied for natural gas and now looks much tighter. As you know, the natural gas business internationally is really dependent on getting customers to sign up. I think customers are more motivated now, and it's probably overdone as I said earlier, we expect the markets to correct, but it is a better time for us to be engaging. It's a great resource that in many cases is backing out coal, has expansion opportunities, and has been free cash flow positive from the moment that we closed Noble. It’s just a great asset, and it’s well-positioned now to have opportunities to grow in the future.

Great. Thank you.

We'll take our next question from Paul Sankey with Sankey Research.

Hi, everyone. Pierre, if I could start with you. Would it be possible to try and normalize your exposure to LNG given that there's so many moving parts over the course of the past year or so? I'm just noticing that you said during your comments that your spot exposure will be somewhat different in Q4 as a result of customers pulling long-term contracts. If we could just take the part of it and further normalize into 2022, 2023, where are your volumes and how much of that is going to be long-term versus spot? If you could have a go at that. Thanks.

Paul, we will discuss that in more detail during our fourth-quarter call when we provide full-year guidance on several items. We have a long-term contract that will start next year, which will slightly increase our proportion of long-term contracts. We've been around 80% in that regard. This is why we've only provided guidance for this quarter, as the situation will change a bit next year, but we will cover it in more detail during the fourth-quarter call.

Okay. I'll move on to more. But if I could just slip a quick one of a few in regards to modeling, do I assume that we've put everything into buyback in terms of free cash flow, or are there any other items that you would highlight maybe pension with something that we should just be aware of going into 2022, and how much we consider your buyback to be? Thanks.

Over time the vast majority of the excess cash will be returned to shareholders in the form of higher dividends and the buyback. We did a one-time pension supplement last quarter, it was really tied to the very low interest rates from a year ago. It sounds like a long time ago. But under the Pension Benefit Guaranty Corporation rules, the funding requirement is fixed by year-end interest rates. And so we were a little bit underfunded and therefore, would have paid a little higher, that's called a variable interest rate essentially, higher than our cost of borrowing, and so that's why we supplemented it. Obviously, we're in a much different place in terms of interest rates now, and you'd expect our pension contributions to be as they have been. We provide guidance on pension in our 10-Q filings. So I would not expect anything on that end. So, again, if you go to our financial priorities, Paul, you know them well. Sustain and grow the dividend. It's up 12% since pre-COVID, the biggest increase in the sector. Our capital guidance is going to be up, but it's no change from the guidance range and it's a very tight guidance range and very capital efficient and lower where it was pre-COVID. We're going to pay down a little more debt. As I said, we're fast approaching a level where we can increase our buyback range. And so then, the balance is excess cash, and over time, it goes to shareholders. We're not going to sweep out each quarter because investors are very clear that they want us to maintain a buyback through the cycle.

I guess that would mean no specials.

I think it's time for you to ask the question to Mark.

Thank you.

Hey, guys, good morning. 2 questions.

Morning.

Morning to you, sir.

The first question is for Mark. You mentioned that the Pasadena Refinery was a one-off situation, as it complemented your Pascagoula Refinery. There are several refineries currently up for sale. With a significant amount of refining capacity being shut down, does this alter your perspective on that business, or do you believe you already have enough capacity and don't need to expand? Additionally, regarding retail marketing, some of your competitors have been actively expanding in the U.S., while you have not pursued this for over a decade. Is there any consideration of returning to that area, especially in light of the energy transition and developments like EV charging?

All right, Paul, thank you for the questions. I'll take them, again, in reverse order. I think your second question was really about retail marketing. And as you know, we have three world-class brands, and we've taken a capital-light approach to selling our branded fuels. In fact, one of the metrics that we often look at is the Opus brand power rating and we continue to be well at the top of that list. That means that the majority of our retail sites around the world that you would see are owned by retailers who have specifically chosen our brand. We have our brand, our fuel and generally not our capital. We also happen to have one of the strongest retail convenience franchising offerings out there, extra mile that you've probably seen. In fact, I think we hit our 1,000th site this year, with very little attrition. So we believe that our limited capital approach provides us the majority of the margin sustainably delivered high returns, and still allows us to stay connected with customers. As part of that offering to customers today, we have EV charging stations in seven countries around the world, and we're partnering with our retailers to continue to expand that offering as customers actually need it. Your second question was, I think about the refinery portfolio in general and maybe Pasadena specifically. We're very pleased with our refining portfolio today. It's really because of the hydroprocessing capacity that we have across our system. That gives us flexibility to deal with the fuels of the future and renewable fuels in particular, in a very, very capital-efficient way. Specific to Pasadena. Again, we have an opportunity there. The premise of the acquisition continues to hold for us in processing our equity crude, being able to supply our own service stations in the Texas-Louisiana area. And then of course, having the intermediate back and forth between Pascagoula and Pasadena. That's all working as we would expect. We've shared that we think there's an opportunity there to have very efficient expansion of light tight oil processing capacity, and we've hinted that that's going to be a hydro-skimming focus. We're working on that real hard and look forward to talking more about that next year. Thanks for the question, Paul.

Thanks for the question, Paul.

The second question is for Pierre. You talked about say the TCO dividend, how about Angola LNG, can you give us some idea that if the current commodity price falls? So we assume every year that both Angola LNG and the TCO is going to pay the dividend. Any cost sensitivity you can provide that you have to change in the oil price, how the impact on that dividend payout is going to look like?

With Angola LNG, we are guiding towards a return of capital of $300 million. This is essentially a dividend, though characterized as a return of capital for accounting purposes. It represents cash flow and impacts the bottom line. Looking ahead, Angola LNG sells into the spot market, primarily on oil-linked pricing, as well as to Europe’s TTF and the international JKM markets, giving it exposure to global natural gas prices. The $300 million return on capital is expected in the fourth quarter. We will also provide guidance for our entire LNG portfolio during the fourth-quarter call for 2022, which will cover Australia, Angola LNG, and our stake in Equatorial Guinea, another asset acquired through Noble Energy.

Okay, understood. Thank you.

We'll take our next question from Manav Gupta with Credit Suisse.

Hey, I have two questions. First, I want to get your thoughts on the mid-cycle chemical margins. Historically, we expected the mid-cycle to be around $0.25, but right now it seems to be closer to $0.65. Although you mentioned that margins will decline, some major chemical ethylene companies are suggesting they will remain above mid-cycle levels for the next 2 to 3 years. So while the mid-cycle may be $0.25, it could still be in the range of $0.35 to $0.40. My second question is regarding your entry into CNG distribution. Is this part of your strategy to develop RNG and control the entire value chain to facilitate the distribution of the RNG that you plan to produce?

Thank you, Manav, for your question. Regarding petrochemical margins, we expect pet-chem demand to continue growing in line with long-term GDP growth. However, we anticipate capacity growth will exceed demand in the coming years, pushing us towards the lower end of the margin cycle. During our Investor Day discussions last year, we adjusted our outlook to a conservative estimate of $0.20 per pound for future margins, and we will certainly welcome anything above that. This motivates us in our CPChem joint venture to focus on reducing unit costs, which they have successfully achieved and will continue to pursue. As for the RNG portfolio, you interpreted it correctly. Our acquisition of the 60 American natural gas sites allows us to leverage our strengths. When discussing renewable natural gas, we emphasize the importance of bio feedstocks to enhance our value chain activation and partnerships. You can see this in our formal presentation, particularly with the gas sourced from CalBio at the farms we operate, and our Brightmark project, which has delivered gas to the 60 American natural gas CNG sites in collaboration with Mercuria. This enables us to meet customer demand for CNG across our portfolio, marking the first step in our strategy for growth.

Thank you.

Thank you. I have a high-level question regarding the energy transition spotlight event you held recently. You mentioned that nearly 10% of the capital budget is allocated to local run businesses. One of your competitors in the U.S. has raised theirs to a similar percentage. Considering the feedback you've received since then, it seems to me this is a sensible approach to balance capital allocation towards low-carbon businesses while managing the risk of returns dilution. In light of the feedback over the past few months, do you believe that maintaining 10% of the budget is sufficient, or do you anticipate increasing pressure to raise that percentage in the future?

I'll start and then I'll ask Mark to talk a little bit about some of our renewable fuels activities in his portfolio. We have good shareholder support in alignment for our strategy and objectives of high returns and lower carbon. That's both lowering the carbon intensity of our traditional operations and then growing low-carbon businesses that leverage our strengths, our capabilities, assets, and customer relationships. And they target the sectors that cannot be easily electrified, the hard-to-abate sector. So this is things like air travel, industrial emissions, heavy-duty transport. The $10 billion of capital is connected to some pretty ambitious targets that go up to 2030. So 150,000 tons per annum of hydrogen, 25 million tons per year of carbon capture and storage. That's all consistent with that capital guidance. So we are more in the execution mode and getting it done versus, let's say competing on CapEx targets. It's not easy to do, these are ambitious targets. They have challenges and lots of opportunity, but let me ask Mark to talk a bit about his portion of that on renewable fuels.

Thank you for the question, Ryan. I can provide a concrete example. Consider our El Segundo Refinery and its diesel hydrotreater conversion. We have identified several key factors for success in renewable diesel, including the ability to sell at the right margin, secure suitable feedstocks, and achieve capital efficiency. In Southern California, our El Segundo Refinery exemplifies these points. We've already increased our sales to nearly 40%, with over 30% of our production being renewable and biodiesel. Our joint venture with Bungie is progressing towards definitive agreements, and they are already supplying us at the El Segundo Refinery. Most importantly, capital efficiency plays a crucial role. We indicated in our energy transition spotlight our expectation to lead in the capital conversion of specific hydroprocessing units within our system, targeting costs of less than a dollar per gallon of annual capacity, including any necessary pretreatment. This approach will allow us to produce both renewable and conventional diesel with just a catalyst change if required. Looking back, our initial investments in co-processing at El Segundo were made at low cost, enabling us to assess tanking, piping, and metallurgy needs. We are now aiming for a complete conversion of that diesel hydrotreater by the end of next year. It will be a challenging task, but our team is dedicated and making significant progress toward achieving 100% renewable diesel capacity with over 10,000 barrels per day. Thank you for the question, Ryan.

Great, thanks, Mark. Maybe a follow-up on some of your comments earlier, Pierre, where you mentioned when you were talking about the gas market and you mentioned the Eastern Med opportunities. You haven't talked about that much in a little while. In your conversations with potential buyers of that gas in the base, and I mean, in the past, when it was operated by Noble, there was talk of everything between European targets to pipelines to Egypt, to floating LNG, and all sorts of opportunities. Any thoughts on what may look like it makes the most sense there in the Eastern Med and opportunities for whether it's shorter-term de-bottlenecking and an opportunity there versus longer-term project development?

All options are still on the table, Ryan, and it's commercially sensitive, so I don't want to show our hand in any way. I mean, the point is that this is a great resource. There are some very low-cost expansions that can be done, and there's some larger expansions that can be done over time. What's really changed is that this was in a geography that a year ago looked oversupplied for natural gas and now looks much tighter. As you know, the natural gas business internationally is really dependent on getting customers to sign up. I think customers are more motivated now, and it's probably overdone as I said earlier, we expect the markets to correct, but it is a better time for us to be engaging. It's a great resource that in many cases is backing out coal, has expansion opportunities, and has been free cash flow positive from the moment that we closed Noble. It’s just a great asset, and it’s well-positioned now to have opportunities to grow in the future.

Great. Thank you.

We'll take our last question from Jason Gabelman with Cowen.

Thank you for fitting me in. I might have missed it, but could you explain the reasons behind TCO declaring this dividend now? Additionally, what should we look for to determine if they will declare it next year, and how can we calculate that? My second question is about cost inflation. Are you noticing any impact on TCO from inflation across your projects, particularly in your long-cycle or short-cycle projects in the Permian? Thank you.

Thank you, Jason. I should have noted that TCO is now paying a dividend. While it was part of our plan, it might be higher than anticipated, which is why we've provided a range. This is primarily due to two factors: first, the macroeconomic environment is stronger, enabling us to produce light oil that attracts trades at a tight discount to Brent, and, with the fiscal terms in place, it is generating excess cash. We’ve also observed genuine cost savings at the project, including some deferrals which will help retain cash in TCO. Additionally, we've experienced improved efficiencies and some foreign exchange benefits. Overall, this reflects a favorable market environment and effective project execution. As for 2022, we will offer guidance in the fourth-quarter call as we have in previous years, focusing on the cash flow line that represents the difference between dividends and affiliate earnings. We may also provide a range for expected dividends from Tengiz and other major affiliates. Regarding costs, we are not observing significant increases. U.S. onshore rig costs are inching up, but they remain well below pre-COVID levels, and generally, the industry is operating below capacity. While there are some goods and services tied to the broader economy, such as steel, which has increased, most of our costs are linked to industry-specific major equipment that is still operating below capacity. Although there is much discussion about potential cost increases, our current experience indicates that costs are well under control.

Thanks.

I would like to thank everyone for your time today. We appreciate your interest in Chevron and everyone's participation on today's call, please stay safe and healthy. Katie, back to you.

Thank you. This concludes Chevron's third quarter 2021 earnings conference call. You may now disconnect.