Earnings Call Transcript - CVX Q2 2020

Operator, Operator

Good morning. My name is Audra, and I will be your conference facilitator today. Welcome to Chevron's Second Quarter 2020 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 call over to the General Manager of Investor Relations of Chevron Corporation, Mr. Wayne Borduin. Please go ahead, sir.

Wayne Borduin, General Manager of Investor Relations

Thank you, Audra, and welcome to Chevron's Second Quarter Earnings Conference Call and Webcast. On the call with me today are Jay Johnson, EVP of Upstream; and Pierre Breber, CFO. We'll 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. Please review the cautionary statement on slide 2. Now, I'll turn it over to Pierre.

Pierre Breber, CFO

Thanks, Wayne. The second quarter was a challenging one for the company. Financial results included $4.9 billion in special item net charges and a foreign exchange loss of over $400 million. Excluding special items and FX, the quarter resulted in a $3 billion loss or $1.59 per share. A reconciliation of non-GAAP measures can be found in the appendix of this presentation. Cash flow from operations was about $100 million, and total capital spending was $3.3 billion, including about $300 million for the Puma Energy, Australia acquisition. Asset sale proceeds for the quarter were about $1.5 billion related to the sale of our Azerbaijan and Colombia upstream businesses. Our dividend was flat with the prior quarter, and we maintained a strong balance sheet. In the second quarter, we recorded over $5 billion in impairments and other non-cash charges. The charges were triggered by the uncertain operating environment and outlook in Venezuela, a lower oil and gas price forecast due to the anticipated economic impacts of COVID-19, and severance accruals resulting from our transformation initiative. While we are disappointed by the impairment in Venezuela, we intend to maintain a presence in the country and resume normal operations one day. The price-related impairments were primarily related to Stampede, a non-operated field in the Gulf of Mexico; conventional operations in the Permian; and various producing assets in Asia and Africa. These charges were partially offset by a gain on asset sales and various tax items. We remain on track to meet our revised guidance for 2020 capital and operating cost reductions. Organic CapEx in the second quarter was $3 billion, already at a run rate 40% below the original budget. Full year capital guidance remains unchanged at $14 billion, as we will need to see sustained economic recovery and much lower inventories before considering raising activity levels. Operating costs are also trending lower, in line with our expectation of $1 billion savings compared to 2019. Organizational design from our transformation efforts is complete. Employee selections are underway, and we expect to be operating under our new model in the fourth quarter, delivering additional run rate savings next year. Our financial priorities remain unchanged. We're on track to grow the dividend for the 33rd straight year. Cash flow from operations in the second quarter was low due to the market environment. This was partially offset by lower cash CapEx and asset sale proceeds. Higher debt this quarter included our successful bond issuance in May. Our balance sheet remains strong with a net debt ratio below 17%, well ahead of our competitors.

Jay Johnson, EVP of Upstream

Thanks, Pierre. On slide 9, second quarter oil equivalent production, excluding asset sales, was flat compared to a year ago. During the quarter, increased Permian shale and tight production and higher entitlement effects were offset primarily by curtailments and turnarounds. I'm really proud that our employees have kept our upstream operations running safely and reliably during this global pandemic. With all of the challenges of moving people and equipment, and of course, personal concerns at home, our employees have risen to the occasion to deliver the energy needed in recovering economies. Turning to the Permian. We're making disciplined choices to balance short-term cash flow while preserving long-term value. In response to the current market conditions, we quickly reduced our flexible capital program across the portfolio and in the Permian, expect quarterly capital spend in the second half of the year to be about 75% lower than the first quarter. As of July, we've reduced our operated rig count to four with one completion crew. Although the level of activity in the Permian has rapidly changed, our focus on efficiency has not. By the end of this year, we expect to double the lateral feet drilled per rig compared to 2018. With lower capital investments and our improving efficiency, we still expect to be free cash flow positive this year at strip pricing.

Pierre Breber, CFO

Thanks, Jay. Slide 14 highlights some recent announcements. On July 1st, we safely started up production in the Partition Zone and completed the first export this week. Also, we closed the acquisition of Puma Energy, Australia. These assets will integrate with our refining and marketing value chain in Asia Pacific and extend the valued Caltex brand in the region. Earlier this month, we signed an agreement with Algonquin, a leader in renewable power generation, to co-develop renewable power projects that will support our operations. Initial project assessments will be focused on the Permian, Argentina, Kazakhstan, and Australia. Last week, we announced we had reached an agreement to acquire Noble Energy. As the necessary regulatory and approval steps progress, we've also launched our integration planning efforts. Representatives from both companies are meeting today to kick off the planning discussion, and we look forward to integrating Noble's complementary assets, people, and capabilities into Chevron. Looking ahead, we anticipate a straightforward and fast integration. Our internal transformation efforts should help us efficiently integrate the new organization and achieve our synergy targets.

Wayne Borduin, General Manager of Investor Relations

Thanks, Pierre. That concludes our prepared remarks. We're now ready to take your questions. 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 will do our best to get all of your questions answered. Audra, please open the lines.

Phil Gresh, Analyst

Yes, hi good morning. First question is just kind of tying together the commentary in the Permian for next year being down 6% to 7% with your CapEx commentary that you've provided, which I think in the past, you've said $3 billion quarterly run rate for second half CapEx on a C&E basis, not on a cash CapEx basis. So, is the Permian commentary consistent with just keeping that CapEx at that type of run rate in the second half of the year?

Pierre Breber, CFO

Yes. So, we had an approved budget of $20 billion. When we announced our market response plan and then updated it at our earnings call, we reduced the full year to $14 billion average, but a run rate of $12 billion essentially for the second half of the year. We achieved that a quarter early. So, if you back out the Puma Energy (Australia) acquisition, we were at $3 billion already in the second quarter and that's obviously at that $12 billion annual run rate, which is a 40% reduction. And embedded in that are the reductions that Jay referred to in the Permian and operating at the current 4 rigs and one completion crew.

Phil Gresh, Analyst

Okay, got it. So, you keep it at that level in 2021 for a 6% to 7% decline?

Pierre Breber, CFO

Well, yes, I'm sorry. So, yes, we haven't given capital guidance for 2021. We're in the middle of our planning process. We'll do our normal disclosure and sharing of what our capital budget is for 2021 in December when we've completed our plan and the Board has approved the plan. What we are showing is it's just an outlook based on current activity level. We early on guided to Permian production being about 20% lower on the exit rate from relative to our Investor Day guidance. And actually, we're doing a bit better than that. So that would have taken us down a little bit lower than what you're seeing on that chart. And then executing this plan and staying at this activity level, yes, we project that kind of guidance. We're not giving production guidance. There's a lot of time between now and then. We're just sort of showing what the outlook looks like if activity levels stay at the same level.

Phil Gresh, Analyst

Okay, got it. My second question just would be on Gorgon. There have been some media reports out there talking about some operational hiccups on Train 2 and getting that restarted, I think you were planning in mid-July. It sounds like maybe it's early September at this point. But could you just elaborate on what's happening there? What the root cause of this delay is? And what it would mean for being able to meet contractual obligations? I think you're about 80% contracted at Gorgon, but just any color there would be helpful. Thank you.

Jay Johnson, EVP of Upstream

Yes. Phil, I'll take that one. So, our fundamental concern is operating safely and reliably and we're always going to take decisions in alignment with that. As part of our normal operations, we take trains down for turnarounds to do inspections and maintenance. And during the Train 2 turnaround, what we found in the Train 2 propane heat exchangers or kettle, some call them, we saw some well defects. So, we developed a repair procedure, and they're progressing well on those repairs. We expect them to be fully accomplished here in the near term, and we expect to have the train up and running in early September. All the other planned work for the turnaround has already been completed. So the focus really is just on completing these repairs to the propane heat exchangers. We're going to use the findings from what we saw in train 2 to plan the appropriate actions for train 1 and train 3. But at this point, train 1 and 3 run normally as expected. And we've actually seen good stable operations out of them. So at this point, there have not been challenges in delivering on our commitments, and I don't anticipate that as we look forward.

Wayne Borduin, General Manager of Investor Relations

Okay. Thank you, Phil.

Jason Gammel, Analyst

Thanks very much. I guess the first question I have for Pierre is it's obviously a pretty tough quarter. But, I wasn't necessarily expecting cash from operations ex-working capital to be negative. So can you address if there's anything in the quarter that is sort of a one-off item that affected the cash number? Or is this just purely the result of the core pricing margin environment?

Pierre Breber, CFO

It was a challenging quarter. To give some perspective, we had a significant beat last quarter but missed this quarter. One of the main factors we discussed last quarter, and this morning, is related to timing effects. These effects tend to help us when oil prices are falling but reverse when prices are rising. We experienced declining prices in the first quarter and rising prices in the second quarter. Some of these effects impact cash flow because they are linked to our cost of goods sold, creating a timing difference on margin recognition. Additionally, the industry faced very volatile conditions, including historically low prices at times. There were moments when we couldn't align with the benchmark crude prices. This was evident in the U.S. at certain times, complicated by factors like calendar roles and physical differentials, which we adjusted to quickly. The situation was fluid. Outside the U.S., certain crudes like the CPC blend were discounted more heavily compared to Brent than usual. Our West African crudes also faced similar atypical discounts. Furthermore, we operated our downstream facilities at much lower utilization rates than normal. This was due to unprecedented decreases in demand, which we had to manage to align with market needs. In the U.S., our crude utilization was at 55%, significantly below capacity, highlighting the extraordinary circumstances of the second quarter. This led to much lower sales volumes, which adversely impacted margins. Lastly, while there are non-cash elements in our earnings, like stock-based compensation accruals for employees, there was a notable swing compared to the previous quarter. Thus, while there are some non-cash impacts, realizations, volumes, and timing aspects also influenced cash flow. Overall, the unusual and extraordinary industry conditions were the primary factors affecting our results.

Jason Gammel, Analyst

No, I appreciate that, Pierre. Hopefully, we won't ever see another quarter like this past one. Second question is for Jay. Jay, this is the first time, we've been able to speak with you since the Noble acquisition was announced. I was hoping you might be able to give us your view of the quality and fit of those assets into the Chevron portfolio, and specifically interested in the Permian acreage, and your view on the East Med and the potential for future expansion.

Jay Johnson, EVP of Upstream

Thank you, Jason. We're excited to add these assets to our portfolio. They are a great fit for us. With the Eastern Mediterranean and the DJ Basin, we see two large operations that align well with our capabilities. Our experience in the Middle East makes this a valuable addition to what we currently have. In Colorado, we are pleased to enter the DJ Basin, which offers significant growth potential and strong returns. In the Permian, acquiring approximately 90,000 acres enhances our existing operations in the Delaware Basin, creating good synergies. Additionally, there are other assets in the Noble portfolio that will be beneficial. We will continue to assess their performance, and overall, I am satisfied with what we are incorporating into the portfolio. It seems like a great fit, and we are excited about the talented people at Noble as well. We look forward to welcoming them to our family.

Devin McDermott, Analyst

Hey, good morning. Thanks for taking the question.

Jay Johnson, EVP of Upstream

Good morning, Devin.

Devin McDermott, Analyst

So my first one is on TCO, and just following up on some of the prepared remarks, Jay, that you had. And when we think about the critical path here for the back half of 2020 and really into the next few years, you noted that you have all the materials on site to achieve that critical path. But I wanted to ask specifically on the remobilization of the workforce and how you're planning that to continue to achieve execution on the critical path items as we think about the overall project timeline, any risk of delays? Just a little bit more detail on how you're thinking about the interplay there with the critical path and remobilization of workforce?

Jay Johnson, EVP of Upstream

Thank you. We made significant progress over the winter and are ahead of schedule with the modules being completed on time and arriving in good quality and accurate dimensions. We anticipate completing the sealift this year, which is crucial for maintaining the project schedule. Regarding our ground workforce, Kazakhstan, similar to many other countries, is experiencing substantial effects from COVID-19. As a precaution, we reduced our planned workforce by about 20% in the second quarter, which means we need to bring back approximately 20,000 workers. In June and July, we've been facilitating crew changes for those still in Tengiz, allowing us to test the systems we've implemented. This includes testing workers at their original location before returning to Tengiz and setting up isolation camps upon arrival, where even those with negative tests will undergo isolation during the quarantine period before being retested for permission to proceed to Tengiz. We are utilizing a pod strategy to keep groups of workers together and separate from others regarding living arrangements, transportation, and meals to ensure adequate safety measures for the workforce. Our primary concern is the safety of our workers and maintaining operations as we rebuild. We expect mobilization to occur over roughly four months, but this will depend significantly on the situation in Kazakhstan and the challenges of moving people internationally for a project of this size. We will incorporate lessons learned from the crew change and continue to adapt as we progress with remobilization. While we remain focused on critical path activities, we also need to address a considerable amount of work that was not completed in the second quarter. We expect to see some impact, but we will need to observe how remobilization goes to provide any updated projections on cost or schedule. We anticipate being able to give a more effective update in the first quarter of next year.

Devin McDermott, Analyst

Got it. That's very helpful. And my second question is one relating to the U.S. election and a short-term and a longer-term part. And the shorter-term part is there's a lot of discussion around potential permitting or leasing changes, specifically on federal lands and waters. And one, just how you're thinking about managing that potential risk, given the large presence in the Gulf of Mexico? And the second part of the question and this is the longer-term piece. There's also some discussion around things like clean energy standard or investments from the federal government into things like clean hydrogen over time. And just how you're thinking about managing the business from an investment strategy longer-term to position Chevron for this potential shifting regulatory environment, maybe within the recent announcement on the renewables partnership with Algonquin and how that fits in the longer-term strategy as well?

Pierre Breber, CFO

Sure, Devin, I'll begin and let Jay address the question on federal leasing. At a high level, we collaborate effectively with federal, state, and local governments across the country, regardless of political affiliation. We also engage with governments worldwide, each with different priorities. Energy is crucial as economies recover from the pandemic, and jobs in oil and gas provide good wages and contribute significantly to the economy in various U.S. states and countries globally. We believe that as governments focus on economic recovery, energy will play a vital role. Our company operates responsibly, including our commitment to ESG principles, and the measures we are taking to decrease carbon intensity. Our approach to energy transition revolves around three key areas aimed at lowering our carbon footprint. We have greenhouse gas intensity goals set for 2023, ways to boost renewable energy alongside our operations, and our recent partnership with Algonquin exemplifies how we intend to scale up our efforts. We have previously integrated some wind and solar energy into our Permian and Bakersfield operations, and this partnership will accelerate our global initiatives. We are also active in producing renewable natural gas and renewable liquid fuels, implementing actions in California that align with the low-carbon fuel standard. Additionally, we are investing in innovative technologies, including carbon sequestration, hydrogen, and batteries. We operate one of the world's largest carbon sequestration projects in Australia. In summary, we've been in business for a long time, and we plan to continue for many more years. With upcoming elections in this country and others, we aim to be a constructive partner with those in power and find common ground between our company's operations and government objectives. Now, I will turn it over to Jay.

Jay Johnson, EVP of Upstream

Thanks, Pierre. I'll build on that by just saying I think there's actually a lot of common ground with where the potential administrations want to go. Because we've already been focused on reducing flaring and methane emissions, our greenhouse gas intensity and producing oil and gas, we've had a head start on this. And we continue to stay focused on reducing the impact that we have as we produce these essential products. We think energy plays an essential role in economic growth. And these jobs in the Gulf of Mexico and the Permian are important jobs to the economy. And I think the emphasis on natural gas as a bridging fuel continues to support our operations in both the Gulf of Mexico and Permian. So we'll continue to focus on reducing emissions and lowering our footprint, carbon footprint. But at the same time, we're going to continue to work with whatever administration is in place and work to make sure that there's a good understanding of potential regulation and the impacts that it may have as we move forward.

Pierre Breber, CFO

Thanks, Devin.

Neil Mehta, Analyst

Good morning, team and thank you for taking the time here. The first question I had is around cash flow breakeven. In the past, Pierre, you've talked about cash flow after CapEx breakeven after 40 at 50, the dividend and at 60, the buyback. Just how do you think about that math there now? There are a lot of moving pieces, particularly with downstream, and there's a lot of flexibility on the CapEx side. But any math you can help us think about your rent breakevens would be helpful for aligning the models?

Pierre Breber, CFO

Well, Neil, I mean, you're exactly right. When we talk about oil breakevens, we're just talking about one part of the portfolio and not everything else is held constant. So we've had – we've shown breakevens in the 50s. The actions that we're taking is to get it down in the 40s. That has an assumption around downstream performance, and you will see that in the second quarter. But you'll see that certainly over time. I guess I just would first step back and just say we're in a different place than almost everyone else in our industry. We have one of the strongest balance sheets. We're exiting the quarter here with a net debt ratio of 17%. We've got excellent capital discipline and the ability to flex our capital program down. You saw that we took it down 40% in one quarter with an extraordinary change in the circumstances, reserving the capital and not spending capital to add barrels that just aren't needed, right now as the world is contracting and then coming out of it and hopefully recovering in a sustainable way. We've been ahead of others. We started our asset sales and signed asset sales last year. And you saw those close this quarter, generating cash. And again, we started our restructuring well before COVID, and we're on plan. And we have that work on track. And of course, we signed an agreement to acquire Noble Energy last week. So we – all of our actions are designed consistent with our financial priorities. The first is to sustain and grow the dividend. We showed our stress test last quarter, $30, that I think was made very clear that we have the financial capability and the flexibility in our capital program, the ability to manage our costs to sustain that dividend through what is a stress test. And we're continuing to sustain long-term value of the business. So although, we're taking activity back in the Permian because it brings on production in months and not years, that capital will come back when the world needs the energy, and the value inherent in that resource is still there. And of course, we're making investments as Jay has talked about in Tengiz, which will come on in several years. And again, we're maintaining a strong balance sheet. So that's the high-level framework. Our goal is to get our breakeven as obviously as low as we can. We're planning for lower for longer. It's a very uncertain environment to Jason's question. We hope second quarter was the bottom. It sure feels like it. Things are definitely better than they were in the second quarter, in particular in that April-May time frame. But we've got a plan for lower for longer, show our downside resiliency. We know how to manage the upside. That won't be a problem, but make sure we support the long-term value, so that we can not only just pay the dividend now, but sustain and grow it over time.

Jay Johnson, EVP of Upstream

Yes. Just to build on that a little bit, Pierre. One of the things I really like about the assets as well coming from Noble is that they also have great capital flexibility. So it fits our strategy quite well. And about 75% of the proved reserves have already been developed. So the big capital is largely in the past, and now we're looking at the run opportunities for these assets.

Neil Mehta, Analyst

Appreciate it. And a follow-up here is around impairments. You took $4.8 billion in the quarter. Can you just talk about the framework by which you look at impairments? Obviously, your system is a little different than the IFRS system of some of your competitors. Do you think you're through the bulk of said impairments? And just talk about your approach to calibrating them?

Pierre Breber, CFO

Sure. Let me start with the fourth quarter where we recorded significant impairments, mainly related to our capital decisions, particularly in natural gas. This occurred before COVID-19, as we aimed for disciplined capital expenditure and higher returns while making tough choices. This was the main reason for the impairments seen in that quarter. This quarter, there were two key reasons: first, the unique situation in Venezuela, which I will discuss further, and second, we adjusted our price outlook due to the economic effects of the global pandemic. We are uncertain about the overall impacts, but the economic contraction, assuming a recovery, will likely lead to lower demand for some time, influencing our pricing. Venezuela has posed a challenging operating environment for an extended period. We have been evaluating our investment value quarterly, and in the second quarter, the situation worsened significantly. For instance, our net production share dropped to only 7,000 barrels per day in June. This decline necessitated us to evaluate whether the loss in value is temporary or not. If we determine it’s not temporary, we record an impairment. Under U.S. GAAP, this assessment is strict; once we take an impairment, it cannot be reversed. Other impairments were tied to oil prices, and I have mentioned some of those, which also included severance costs. Following U.S. GAAP, we will continue this assessment each quarter. I can say the impairments this quarter were largely of a different nature compared to last quarter. Regarding the price-related impairments, they predominantly affected mature or late-stage assets, where lower price forecasts impact the remaining production and carrying value. However, the long-lived assets were not impaired. Now, I'll hand it over to Jay to discuss Venezuela further.

Jay Johnson, EVP of Upstream

Thanks, Pierre. Venezuela, we took the impairment there, but our fundamental approach has not changed. And that's what we are still committed to being present in Venezuela, and we look forward to one day resuming full operations. Our license was extended to the 1st of December, 2020, and that license allows us to take on the activities for safety and maintaining asset integrity. And our focus is on keeping people and the assets and operations safe. We support communities in Venezuela. We believe we're a force for good. We'll continue to be compliant with all laws and regulations, both in U.S. and Venezuela. And we just take it a day at a time, but our commitment still remains. And we think the underlying asset value is still there.

Wayne Borduin, General Manager of Investor Relations

Thanks, Paul. We appreciate your questions.

Paul Sankey, Analyst

Hi, everyone. Can you hear me okay?

Pierre Breber, CFO

Yes. Hi, Paul.

Paul Sankey, Analyst

Hi. Thanks. I have a couple of questions. First, regarding the issues faced in the quarter, some other major oil companies reported strong trading results. Would it be accurate to say that your trading operation and appetite are smaller, which contributed to not seeing much benefit in this quarter? For my second question, you mentioned breakeven. I believe Jay also referenced breakeven, indicating it would be at strip by the end of the year. Are you referring to aiming for around 40? If I'm misunderstanding that, could you please clarify the different components involved? It could be related to downstream, but I might have missed that, sorry. If you could summarize it for me, I would appreciate it. Thanks a lot.

Pierre Breber, CFO

Let me address the breakeven question. Our breakeven last year and early this quarter was in the low 50s. The actions we're taking to reduce capital and costs are on track with our guidance and going well. If everything else remains constant, that would lower our breakeven into the 40s. However, not everything is constant. In particular, in downstream and chemicals, we’ve noted weaker margins and significantly lower volume. We will have to see how that develops. As the downstream stabilizes over time, those reductions should lead to a lower breakeven. We mentioned that the Permian will be free cash flow positive at strip pricing. This year, in the Permian, we reaffirm that we will still be free cash flow positive, even with the current investment level and changes taking place, though that was specific to the Permian at strip pricing. Regarding trading, we don’t disclose our trading earnings separately. The priorities for the trading organization are to ensure the flow of our upstream barrels in and out of our refineries, optimize around those positions, and trade. At certain times this quarter, the market had steep contango, which provided trading opportunities. You'll see those results reflected in the upstream and downstream segments both this quarter and in future quarters.

Paul Sankey, Analyst

Okay. Thanks. So apologies for misunderstanding. Thank you.

Jeanine Wai, Analyst

Hi. Good morning, everyone.

Pierre Breber, CFO

Good morning, Jeanine.

Jeanine Wai, Analyst

Good morning. My first question is on the overall business. And, I guess, understanding that growth is an output of capital allocation decision. You're working really hard to materially reduce the cost structure. Is there an opportunity for Chevron to meet the prior ROCE and 3% CAGR targets that you laid out at the analyst meeting at a Brent price below the former $60 that you talked about? Or are those targets just kind of no longer the right way to think about the business, given your updated view on macro? I know you just mentioned that you were planning for lower for longer.

Pierre Breber, CFO

Well, let me start and Jay might want to add. I mean, yes, certainly, the ability to deliver that kind of production volume is there, because all of the resource and the opportunities, whether it's in the Permian, whether it's the other opportunities we showed during our Investor Day, they are all there. Now there's no doubt, we had our Investor Day on March 3. And by that weekend, and we showed a $60 Brent nominal flat pricing for five years, which everyone agreed was a reasonable assumption, I think. And by the weekend, oil was in the 30s, and the Russian savvy agreement fell apart. And then a few weeks later, we were in a massive economic contraction. So there's no doubt that the world has changed from that Investor Day, and we're in the middle of our planning process, and we'll provide revised updated guidance. But our ability to deliver that kind of production is absolutely there. The question will be, is that still the right strategy? I think we have to step back and look at a sector that is underperforming the broader equity markets. And we're underperforming primarily because of low returns and a lack of capital discipline. So when you hear us talk about capital discipline in our organic portfolio and the actions that Jay is taking to be disciplined with our capital and in our downstream, too, being disciplined around the capital to approach the energy transition to Devin's question, we have to do that in a disciplined way. And then organically, inorganically, we have to be disciplined with capital. The only way to increase returns and regain favor with investors, it's not by outgrowing and is not by having capital flowing back into opportunities. It's by being very disciplined and generating high returns by being really ruthless in our allocation. So I think that's all the way to say is we're going to revise our plans. All the opportunities are there. Whether that's the most optimal outlook going forward, we'll decide. But our commitment to capital discipline, our commitment to raising returns is going to continue, and it's essential for us to be able to deliver higher returns over time.

Jay Johnson, EVP of Upstream

Yes. To expand on that, we had strong performance last year and entering this year. Well before the COVID crisis, we started a comprehensive transformation effort that impacts every part of the company. This effort focuses on better integrating technology into our operations and workflows to enhance efficiency across our organizations and provide technical services to our business units. In the upstream sector, we reduced from four to three regions effective July 1. We also streamlined from one to two layers across our organization. We're building on the geographic-based business unit in the upstream that has benefited us greatly while introducing asset class coordination to enhance collaboration across business unit, geographic, and segment boundaries. We are also placing a greater emphasis on value chains to ensure we achieve the highest realization for our upstream products. The transformation not only involves some restructuring but also significantly influences how we approach the business and the financial knowledge we’re cultivating throughout our workforce. This focus aims to improve returns and identify gaps between our current standing and potential, while also addressing the lower-for-longer mentality and its associated impacts. In summary, I believe we will continue to lower our cost structure and strive to enhance our returns.

Jeanine Wai, Analyst

Thank you for your question. My follow-up is related to the Permian. Looking at the medium to long term and the efficiency improvements you've mentioned, you've previously noted that Chevron can increase production in the Permian to about 1.2 million barrels a day with a capital expenditure of $4 billion to $5 billion. I realize that's not happening immediately. However, beyond the drilling efficiencies you've described, and assuming there is a recovery in demand, how significant could these efficiency improvements be? Specifically, based on your observations, do you believe it would be possible to achieve similar productivity levels of 1.2 million barrels a day at a considerably lower capital expenditure?

Jay Johnson, EVP of Upstream

Yes, Jeanine. I think we're poised to continue to drive increased efficiency throughout the Permian operations. The drilling is just one example where we're seeing that efficiency, but the advances in technology, the advances in our understanding of the reservoirs and how to best complete and produce from those. The integration of our operation centers, the maintenance, the operations are all driving efficiency. While the near-term activity levels, we've changed those because we can and because we think it's prudent, given the current environment that we find ourselves in, the underlying long-term value and even mid-term value of this asset is unchanged. And I'm actually really excited about the changes that we're making and how we are working together in the organization. And so I do expect to see us be able to deliver on previous expectations and continue to deliver on becoming a more efficient, more effective operator in the Permian Basin.

Wayne Borduin, General Manager of Investor Relations

Thanks, Jeanine.

Paul Cheng, Analyst

Hey, guys. Good morning.

Jay Johnson, EVP of Upstream

Good morning, Paul.

Paul Cheng, Analyst

I have two questions. I think one for Jay, one for Pierre. Jay, you mentioned about the problem in Gorgon. It's a bit surprising, given it's a new machine. I mean, the feed has only come on stream for, say, less than five years and that you have this problem. So is the problem? Is a design issue or that is just poor workmanship? And also whether the same vendor is applying those to the Train 1 and Train 3 as well as Wheatstone? And if they are, have you already did some inspection on those units?

Jay Johnson, EVP of Upstream

Yes, Paul. So the defects that we found in the wells, we believe were there from the original manufacturer. They're not a design defect at all, but they are a manufacturing defect. They were discovered in train 2, when we took train 2 down for its first major turnaround and inspection. And as I said, as part of the routine inspection, that's when we encountered this particular issue. We are evaluating based on the learnings that we've got how to best address Trains 1 and 3. And we put additional mitigations in place until that's been accomplished. We do not have the same manufacturer for the vessels in Wheatstone. It's a different manufacturer, and I don't expect to see the same issue replicated there.

Paul Cheng, Analyst

And Jay, train 1 and train 3 already went through the full turnaround recently, right, just in the last year or two?

Jay Johnson, EVP of Upstream

No. Train 1 went through the turnaround last year. Train 3 is scheduled for next year.

Paul Cheng, Analyst

So that's a risk. Yes, Train 3 is more of the risk than Train 1 then because I assume that if there's an issue, when you went through the turnaround in train 1 you should have already discovered?

Jay Johnson, EVP of Upstream

We did not see the issue in Train 1, but we're assessing whether or not we need to reevaluate that inspection and go through it again. And we are addressing how best to inspect and if necessary, repair Train 3 at this time.

Wayne Borduin, General Manager of Investor Relations

Thanks, Paul. Second question?

Paul Cheng, Analyst

Sure. Second question is for Pierre. I heard about, say, the improving return is one of the top priority for the company. We appreciate that. But we then hear that, we have conflicting maybe priority because you – from a cash flow standpoint, you are cutting your CapEx in Permian, and Permian actually is your highest return project, while that you're still investing in Anchor and Tengiz, which is clearly that much lower return comparing to Permian. So how exactly that the company is going to be able to raise your return, when you are not investing at least in the next maybe year or two in the most profitable project? I mean, what steps that you will be able to take?

Jay Johnson, EVP of Upstream

So Paul, one of the things we're doing, as you know, we've been bringing our unit development cost in the deepwater down significantly. Our target is to be below $20 a barrel. Anchor, as we've talked about in the past, opens up new opportunities for us and a new class of deepwater assets. We are pacing the development of Anchor in its most efficient pace. We're not focused on having to bring it on by a certain date, but rather keeping all the different aspects of the project consistent and aligned as we move through the impacts of the COVID crisis. In terms of the Permian, it's simply – we don't see the point of investing in any assets around the world to bring on new production capacity, when the world is so heavily oversupplied. And so because we have that flexibility, we're exercising that, and we'll continue to look at the current environment, and begin ramping up funding and activities when it's appropriate to do so. And we see a better overall supply-demand balance, better fundamentals for the industry.

Pierre Breber, CFO

Yes. Only add to what Jay said, look, we're going to be diversified across different asset classes. We're not going to be a pure-play company, and they're operating on different time frames. And one involves production that comes on in years, and one involves production that comes on in months, and we're making that distinction. So we've been laser-focused on capital that supports long-term value, capital that's adding short-term production has been hit very hard.

Wayne Borduin, General Manager of Investor Relations

Thanks, Paul. We appreciate your questions.

Roger Read, Analyst

Yeah. Thanks, good morning. I guess two things to follow up on. First question for you, Jay, on TCO. Just what do you think the critical – you mentioned critical path items. What are those in 2020 and 2021 we really ought to keep our eyes on for confidence that the project is coming along as expected? And then I don't know if the second question is for Pierre or for you. But as you think about your outlook for the Permian unconventional in 2021 to down 6% to 7% when does that become a written-in-stone event versus something that you could tweak and we could see something different?

Jay Johnson, EVP of Upstream

So, the critical path for TCO, FGP project, it really runs through the setting of all the utility modules and the compressor boost facilities for the wellhead pressure management part of the project and getting those fully integrated. And that's where our real focus is. So it's mechanical, electrical and instrumentation work once those modules are set on their foundations. That really represents the main focus. But there's a lot of work as well that has to be maintained in parallel with that to be able to deliver the project as expected.

Pierre Breber, CFO

On the Permian, we could quickly bring back completion crews if needed. We're currently in our planning phase and will update our capital budget accordingly. Even after establishing a budget, we have the ability to reallocate capital if circumstances change. There is considerable flexibility in the Permian, and there is significant value there. We want to see a sustained economic recovery and a reduction in inventory levels, but if necessary, we could swiftly add completion crews and subsequently increase the number of rigs over time.

Jay Johnson, EVP of Upstream

Just as we brought it down, we can take it back up.

Pierre Breber, CFO

Thanks, Roger.

Doug Leggate, Analyst

Thanks for squeezing in guys. I just got a couple of quick ones. Pierre, perhaps you could just elaborate on your change of price assumption? And what I'm really looking for is do you anticipate that you will continue to add debt, given you've got substantial headroom as you pointed out last quarter over the foreseeable future?

Pierre Breber, CFO

I'm sorry. You broke up a little bit on your question, Doug. Can you say that again?

Doug Leggate, Analyst

Yes. So do you anticipate adding additional debt, given you've still got substantial headroom as you pointed out last quarter? And if you could elaborate, please, on the change on price assumptions that you referred to earlier.

Pierre Breber, CFO

Yes. So on the price assumption, I'm not sure I can say much more. We don't disclose our price outlooks. We view it as commercially sensitive. We're obviously in the market at times selling or buying assets, and we wouldn't want our counterparty to know what our price outlook is. We don't think that's in the interest of our shareholders. But again, we lowered our price outlook primarily due to what we think are the likely lower economic activities due to the global pandemic. No one knows what the recovery will look like, but it's clear that there's been an economic contraction, and it will take some time period to recover. And our products are so closely linked to economic activity. In terms of debt, we had a very successful bond issuance that we did right after last quarter. It was better than any of our peers in terms of the pricing. And we'll continue to monitor the market. We're in a very strong position. Our commercial paper balances are well below levels, very comfortable levels, but we always look at where the market is and what our liquidity is. And we certainly couldn't go to the bond market and do another issuance if we think it's the right thing to do.

Doug Leggate, Analyst

Thanks. My follow-up for Jay real quick. Jay, I hate to get a bit, but your comments about Gorgon, can you just elaborate, is this a true bundle ahead issue? Or what is the remediation that you're anticipating? I'll leave it there. Thanks.

Jay Johnson, EVP of Upstream

So are you asking about the repair for the vessels?

Doug Leggate, Analyst

Yes. I'm just trying to understand the nature of the problem and what remediation, what options you have for remediation?

Jay Johnson, EVP of Upstream

It's really just grinding out and replacing a well that has some abnormalities and ensuring that we have the structural and pressure containing capacity that we're looking for.

Doug Leggate, Analyst

So no chips under replacement?

Jay Johnson, EVP of Upstream

No, we do not need to replace the vessels. We believe the repairs are going to be fully effective.

Wayne Borduin, General Manager of Investor Relations

I'd 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. Audra, back to you.

Operator, Operator

Thank you. Ladies and gentlemen, this concludes Chevron's Second Quarter 2020 Earnings Conference Call. You may now disconnect.