Earnings Call Transcript
CHEVRON CORP (CVX)
Earnings Call Transcript - CVX Q1 2021
Operator, Operator
Good morning. My name is Katie and I will be your conference facilitator today. Welcome to Chevron's First 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 is being recorded. I will now turn the conference call over to the General Manager of Investor Relations of Chevron Corporation, Mr. Roderick Green. Please go ahead.
Roderick Green, General Manager of Investor Relations
Thank you, Katie. Welcome to Chevron’s first quarter earnings conference call and webcast. I am Roderick Green, General Manager of Investor Relations and on the call with me today is 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.
Pierre Breber, CFO
Thanks, Roderick. This quarter, we had our best financial performance of the last year as the global economy recovers. Reported earnings were $1.4 billion and adjusted earnings were $1.7 billion, or $0.90 per share. Included in the quarter were pension settlement costs and legal reserves totaling $351 million. Pension settlement and curtailment costs will be a special item going forward. For comparability purposes, 2020 adjusted earnings were recast to exclude these costs. Also found in the appendix to this presentation is a reconciliation of non-GAAP measures. CapEx was down over 40% from a year ago and we ended the quarter with a net debt ratio of 22.5%. For the first time since the pandemic, cash flow from operations excluding working capital exceeded our cash CapEx and dividend spending. Cash balances ended the quarter slightly higher due to timing considerations. We expect cash balances to come back down later in the year. Free cash flow excluding working capital was $3.4 billion, up significantly from last year and higher than the 2019 quarterly average. With oil prices back up to around 2019 levels and downstream earnings still recovering, higher free cash flow this quarter is driven by the change in cash CapEx, which is less than half of the 2019 quarterly average. Maintaining and growing our dividend remains our top financial priority. Earlier this week, Chevron's Board of Directors approved a $0.05 per share dividend increase, about 4%, that positions Chevron to extend our streak to 34 consecutive years of higher annual dividend per share payouts. Since 2005, Chevron's dividend per share has grown over 7% per year beating the S&P 500 and more than 4 times our peer average. When our first three financial priorities have been met, we also have a track record of repurchasing shares, 13 out of the past 17 years. As we look forward, we expect to begin the repurchase of shares when we're confident that we can sustain a buyback program for multiple years through the oil price cycle. When making this decision, we'll consider the likelihood of future sustained excess cash generation and the strength of the balance sheet. Adjusted first quarter earnings decreased about $700 million versus the same quarter last year. Upstream earnings increased on higher prices and downstream earnings declined on a swing in timing effects and lower margins and volumes resulting from the pandemic. Both segments had negative impacts from Winter Storm Uri. Other was down primarily due to employee benefit costs. Compared with last quarter, adjusted upstream earnings were up more than $1.4 billion due to higher prices. Downstream earnings increased primarily due to margins and timing effects, including the absence of last quarter's year-end inventory valuation adjustment of more than $100 million. Other was down in part due to employee benefit costs. Upstream production was down 3.5% from a year ago. The increase in production due to the Noble acquisition was more than offset by a number of factors including declines, asset sales, Winter Storm Uri, and OPEC+ curtailments. Winter Storm Uri impacted both our upstream and downstream businesses with earnings impact of about $300 million after tax in the quarter. All upstream production has been restored, and major downstream and chemical units have restarted. We also achieved first gas flow from the successful execution of the Alen Gas Monetization Project in Equatorial Guinea. This project allows gas from the Alen field to be processed through existing onshore facilities. Finally, the company announced an agreement to acquire all of the publicly held common units in NBLX. This stock transaction is expected to close in mid-May. We continued to take action to advance a lower carbon future. Last week, we announced an MOU with Toyota to work together to develop commercially viable, large-scale businesses in hydrogen. Also, we’ve continued to invest in emerging low-carbon technologies, including announcing five venture investments this year in geothermal power, offshore wind, and green ammonia. In addition, we're in the early stages of developing a bioenergy project with carbon capture and sequestration in Mendota, California. This plant is expected to convert agricultural waste biomass, such as almond trees, into a gas to generate electricity and sequester emissions of 300,000 tons of CO2 annually. Looking ahead, in the second quarter, we expect turnarounds and downtime to reduce production by 90,000 barrels of oil equivalent per day, primarily in Australia at Gorgon Train 3 where the planned turnaround and repairs of propane vessels are underway. The impact from OPEC curtailments is estimated to be 40,000 barrels of oil equivalent per day, primarily in Kazakhstan. In Kazakhstan, the FGP project recently placed the final module on its foundation. Remobilization of the construction workforce achieved about 95% of the end of first quarter objective. Further workforce additions are expected this quarter. In summary, it was a good quarter with our strongest financial performance in a year, continued progress towards advancing a lower carbon future, and a dividend increase while maintaining an industry-leading balance sheet. During last month's Investor Day, we shared our goal of higher returns, lower carbon. This quarter was another step in that direction. As we look forward to the next few quarters, and the world gains better control of this virus, I'm confident that we will continue to deliver stronger financial performance and help advance a lower carbon future. With that, I will turn it over to Roderick.
Roderick Green, General Manager of Investor Relations
Thanks, Pierre. 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 address all your questions. Katie, please open up the lines.
Operator, Operator
Thank you. Our first question comes from Jeanine Wai with Barclays.
Jeanine Wai, Analyst
Our first question here, maybe just a housekeeping item on the numbers. Can you provide a little more color on the moving pieces for cash flow this quarter? It came in a little below market expectations. And I guess if we're doing it right, we apply your cash flow sensitivity per dollar change and brand. And we're still coming up with a higher cash flow number than reported despite Winter Storm Uri. So we're just wondering if we're missing any other one-offs other than the pension settlement since I know there was a lot going on this quarter.
Pierre Breber, CFO
Yes, thanks. Our dividend break-even in the past couple of quarters with weak downstream margins has been around $50. It was a little higher this quarter. There was nothing operational except Winter Storm Uri; it's really primarily due to some non-operational items like accruals for legal reserves and taxes. Those are non-cash in the quarter. But when we look at cash flow excluding working capital, of course, we're taking out that working capital effect. So those kinds of accruals, which are charges, result in a lower cash flow excluding working capital. I would point out though that our free cash flow in the first quarter 2021 was higher than free cash flow in 2019, even though 2019 had much stronger downstream margins and similar oil prices, and that's primarily because of the cash CapEx. So I think you're doing the calculation correctly. The tricky thing about these cash flow breakeven is you don't hold everything else constant, all the other margins and indicators, and then some of these timing effects on accruals.
Jeanine Wai, Analyst
Okay, great. That's really helpful. Thank you. And then, maybe my second question on the buyback and free cash flow. So on our projections, we see pretty strong near-term free cash flow, and the trajectory really meaningfully steps up in 2024 and 2025, with Tengiz and some of your long cycle projects starting up in the Permian. So I think to us this suggests that for the buyback, it makes a lot of sense to leg into a program, kind of similar to what you did in '18 and '19, versus a consistent amount per year, which I think was the last commentary before the pandemic, which I know changed a ton of things. So can you provide any thoughts on how you envision the buyback getting reinstated?
Pierre Breber, CFO
We have a track record of buying back shares pretty consistently, 13 of the last 17 years, over $50 billion of buyback since that time, at an average price in the mid-80s, less than $1 higher than the ratable price that would have been for every single day during that whole time period. As I said in the prepared remarks, when we start a program, if and when we start a program, we'll want to sustain it for multiple years because we want to get it through the commodity price cycle. Shareholders feel differently about buybacks; there's a concern that we only buy back when our share price is high. That's a perception, that's not the reality, because I just shared with you the actual numbers. But that's the perception that we have to deal with. So the common ground we find is that when we start a program, we must have confidence that we can sustain it for multiple years. And we're going to look at those two factors, the likelihood of future excess cash generation and the strength of the balance sheet to weather a down cycle and oil prices that we know is going to happen. So we're not yet on a sustained global economic recovery. We feel very good about where we are here in the United States and several other countries, but there are a number of countries where they're still working to get control of the virus. And so we think it's appropriate to increase the dividend, which is consistent with our financial priorities. We're not going to increase the capital this year and we have tight guidance out five years; we've positioned the balance sheet very well. So yes, in the short term, any excess cash is going to go to the balance sheet. But over time, excess cash will be returned to shareholders in the form of higher dividends like you saw us announce a couple of days ago and in the form of buybacks over time.
Operator, Operator
We'll take our next question from Doug Leggate with Bank of America.
Doug Leggate, Analyst
Good morning, Pierre, Roderick, and congratulations on your first earnings call. I wonder, Pierre, if I could just hit what might be the 800-pound gorilla in the room, which is the acquisition of Noble. The production seems to have kind of disappeared in the mix. And it's raising some questions, at least from people we speak to, about whether Chevron is under-investing to sustain long-term production capacity; what would your response be to that?
Pierre Breber, CFO
We're not under-investing. We showed during our Investor Day that we're very capital efficient, and at our $14 billion to $16 billion budget, we in fact, we're anticipating production growth around 3%. That's the thought and ambition of us to have production growth as an outcome of what's a very capital efficient program. Jeanine mentioned, we're investing to increase production at Tengiz. We don't have that production right now; that's $2.5 billion in the budget at Tengiz. So we have our eye on long-term value through this whole crisis. If you really step back to when this started about a year ago, we did hit short-term capital pretty hard. We kept our eye on long-term value. We didn't see the virtue in investing capital to add short-term production in a world that was going to be oversupplied for some time. And arguably still is with OPEC+ barrels constrained. And again, we're not back to a full sustained economic recovery. But we preserved the options on long-term value. I'm very cognizant that we have a dividend obligation. We're one of the few companies that didn't cut the dividend; we're the only company that's increased the dividend, and really a dividend increase that averages 6% per year during a very difficult time. We showed during our Investor Day that we have the capability to grow free cash flow 10% per year over five years. That's coming from Tengiz, which we'll see in a couple of years, and growth in the Permian when the world needs the barrel. So we're not going to chase short-term production. We don't see value in that. Our production guidance for this year is unchanged, it remains at 0% to 3%. You saw our reserve replacement numbers, and the Noble acquisition undoubtedly has helped. Remember, we showed, and Mike showed at the last quarter call that we've invested actually the same amount that we expected post-COVID as pre-COVID; pre-COVID, we would have said $20 billion a year for last year and this year, about $40 billion. Organically, we're only going to do about $13 or $14 each year, so when you add in the $12 or $13 from Noble, it is exactly where we were pre-COVID. So we are not under-investing. We have to sustain and grow the enterprise. But we're doing it in a very capital-efficient way.
Doug Leggate, Analyst
Appreciate the answer. Pierre, my follow-up is actually related to CapEx. It's a quick one, but you are obviously running well below your run rate for the year. Is that the timing issue? How would you expect the cadence to look over the balance of the year? And I'll leave it there. Thank you.
Pierre Breber, CFO
Yes, thanks. It is really timing. I mean, first quarter is normally a little light. Winter Storm Uri obviously prevented drilling wells when you're shutting in production and dealing with the challenges of that extraordinary winter event. And then, there is just the timing of some major capital projects that are more back-end loaded. So no change to our guidance of a $14 billion organic program. We might see a small inorganic acquisition in the first quarter numbers. So that can be different going forward. But from an organic perspective, we're going to stick with the budget. We are running a little low, as you say, but we think we'll end up pretty close to that budget by year-end.
Operator, Operator
We will take our next question from Phil Gresh with JPMorgan.
Phil Gresh, Analyst
Hey, Pierre. My first question here is actually a bit of a follow-up in the cash flow in the quarter. There was a $500 million headwind from affiliate cash flows in the quarter and in the last quarter call, you had given guidance for the full year of $0 to $500 million headwind. There was not an update given in the slides this time, so I was wondering if it was just front-loaded, or if there's any change to that. And I recognize the affiliates also can tie into the Tengiz co-lend. So has that guidance changed, either? Thank you.
Pierre Breber, CFO
Yes, thanks. So we didn't change our guidance because it's just early. I think you're right. I think you're inferring that the guidance, in particular for Tengiz, will get better. We gave a co-lending guidance of $1 billion to $2 billion. Right now, we'd be at the low end of the range. And frankly, we could be at zero depending on if prices stay where they are right now. So you should expect us to update that guidance at mid-year when we see a little more clarity with commodity prices. But clearly Tengiz, when we have prices over $60, that reduces the need for co-lending and might not require any. And again, you could see a dividend out of Tengiz—that's a decision for the TCO shareholders to make—but we haven't had a dividend now for two or three years, so that would also be positive. In terms of affiliates, I mean, that cash flow line, again, the difference between earnings from affiliates and the dividends, the dividends were about flat between the fourth quarter and this quarter, so that's not a variance on the cash flow. But you're right, that there are some timing in that and some of the Winter Storm Uri effects factor into CPChem. Again, we'll update that guidance when we get to mid-year.
Phil Gresh, Analyst
Okay. And then, the second question is on Tengiz, you're obviously continuing to ramp the headcount. I think at this point, most investors are assuming some kind of delay in the startup timing as well as impacts to costs from that potential delay. It's hard to overcome maybe a timing delay. But is it possible that you can still, in your mind, be able to do this within budget, even with the timing delays? I recognize you haven't given an official update here, but I just want to get your latest thinking. Thank you.
Pierre Breber, CFO
Yes, thanks. Let me just take us back or start with the Investor Day. We were at 22,000. We remobilized to 25,000, just short of our 26,000 first-quarter objective. Then, you saw where we plan to go in the second quarter. We're excited. Also, a big milestone was getting the last of 86 modules on two foundations. So we're still making very good progress. We are managing through a pandemic. We have all the safeguards in place; they're working. We have a very low rate of positive cases right now. We've also started a vaccination program at Tengiz. It includes both the project and the producing operation staff. So it’s not just for the project, but also for the base operations. We've been allocated about 10,000 doses, and 7000 have been administered already. Future vaccinations, though, will depend on more allocations from the Republic of Kazakhstan. This is not a company program; we're doing it with the government and are allocated by the government in Kazakhstan. To answer your question, at this time, there's more pressure on schedule than costs. We have a backlog of work because of the demobilization last year and having to isolate work teams at times when we do have a positive case. It's possible but hard to fully make up the schedule. We also have incurred higher costs as a result of COVID. We've had some cost efficiencies and some foreign exchange benefits that may offset these higher costs. As we've said in the past, we need to demonstrate that we can remobilize, fully remobilize, stay at full numbers, meet productivity targets and achieve our milestones while managing through a pandemic. The spring and summer work campaigns are very important to give us the data that will help us get reliable updates on cost and schedule.
Operator, Operator
We'll take our next question from Devin McDermott with Morgan Stanley.
Devin McDermott, Analyst
My first one is a follow-up on some of the production questions from earlier, and it relates more specifically to the Permian. One of the things that stood out in your recent Investor Day was the fact that even at a much lower capital spending level, you were still able to achieve a similar level of growth in the Permian over the next few years. It differed slightly from pre-COVID plans but still attractive growth there. As you think about the resumption of activity to facilitate that growth here over the next few years, can you talk a little bit about the cadence and timing or from a market standpoint, what signals in terms of oil prices or otherwise that you need to see, to begin increasing activity there to resume that planned production ramp?
Pierre Breber, CFO
Yes. We've been focused on three metrics, three conditions. Again, oil prices are going to move up and down. We're focused on the fundamentals, and we look at three indicators. The first is, is the global economy on a sustained path to recovery? We're not quite there yet, clearly optimistic here in the United States with high vaccination rates and the stimulus package, a few other countries, but again, a number of countries don't have control of the virus. So we need to get on a sustained path of economic recovery. The second is, we need to see OPEC+ barrels get back into the market. We're starting to see that; we need to have clarity on what actions are to come, but there's still a lot of production that is being curtailed. And the third, and I think the third condition has been largely met, is inventory – levels are back to near normal. So I'd say one of the three conditions now is relevant for us to increase CapEx. Not this year; our budget is fixed this year at $14 billion, but within the $14 billion to $16 billion five-year guidance that we talked about. We’re still talking about a modest increase. In terms of the Permian, everything is going very well there. The first quarter production was clearly impacted by Winter Storm Uri, and that was about 60,000 barrels of oil equivalent a day for the quarter. But if you take that out, production looks good. Our declines we shared last quarter indicated production could decline 6% to 7% if we stayed at low activity levels; it’s probably a little better than that—it might be closer to 5%. But undoubtedly, we’re at the lower investment levels right now; we’ll see some declines. That is okay. That is the correct response to an oversupplied market, especially when we’re keeping an eye on long-term value. So what you could see later this year is we could bring back right now operated, we have five rigs and two completion crews. Our net non-operated is a similar rig count. Certainly, we could bring back a completion crew later this year, and that would help us produce some of our drilled and uncompleted wells. But in terms of getting on the trajectory that we showed at our Investor Day, there’s still time—I mean that outlook considered that we would still be in this kind of not full recovery at this point in time. And then, it ramps up over the next year and the year after that. So can we do it faster? We absolutely can. Can we hold it where we’re at here longer if necessary? We can; it’s very flexible. It’s the appropriate response, but the long-term value is there, the million barrels a day we showed in 2025 is attainable. More importantly, that’s highly accretive to returns, with strong free cash flow, right? Free cash flow was positive last year and growing. So it’s a fantastic position we have. We’re advantaged because of the royalty. We intend to invest there but we’re going to do it at the right time.
Devin McDermott, Analyst
Got it. That makes a lot of sense. As we think about decarbonization, energy transition and returns, I think you've had a very thoughtful approach on that and focusing on returns, enhancing investments, decarbonizing your existing portfolio, integrating renewables has been one of the pillars there. You've had some progress here over the past few months in both venture activities—you highlighted in the slide, the hydrogen MOU. Can you talk a little bit more about Chevron's strategy for transitioning some of the investments and opportunities available to capture so far into new growth ventures over time, including a monetization strategy or scaling strategy for some of the venture investments that you've talked about in your prepared remarks?
Pierre Breber, CFO
Yes, well, you summarized our strategy pretty well, I'll hit it really quickly. The first is to make the oil and gas that we produce as low carbon as we can. We put out 2028 targets that have a 35% reduction. We think we're top quartile. We will stay top quartile. And we showed a slide that says we go beyond that and get carbon intensity down into the mid-teens in terms of kilograms per barrel of oil equivalent. So that’s the first, really done in the segments where the work gets done. The second is to increase renewable energy alongside our conventional products. So, renewable natural gas sold along with conventional natural gas, renewable diesel sold alongside our conventional diesel—you’ve seen we’re going to co-process at our LA refinery later this year biofeed along with conventional feed and make renewable products, having renewable diesel, and biodiesel at more than half of our service stations in the United States. So good progress there. And then, the third is to grow low carbon businesses. And that’s exactly what you mentioned—that’s hydrogen and carbon capture. The venture investments are important, and they’re really making sure we are staying connected to all the latest technology. But we intend to do exactly what you say: to grow these businesses. Let me talk about Project Mendota in California. We’re in partnership with Schlumberger and Microsoft. It is going to capture the emissions from agricultural waste so they burn almond trees after a certain number of productive seasons. Normally, those emissions just go to the atmosphere; this project would capture those emissions, convert them into a synthetic gas that can then generate power, and use that power to compress the CO2 and inject it in the ground and then sell excess power into the grid. That project is now in front-end engineering and design. We’re looking at another carbon capture pilot with Savante in Bakersfield. So the venture investments are an enabler to growing hydrogen and carbon capture business. That’s exactly what we intend to do over time. These are nascent businesses that require lots of partnerships, but we’re going to be a player in it.
Operator, Operator
We'll take our next question from Neil Mehta with Goldman Sachs.
Neil Mehta, Analyst
So, the first one is just on Gorgon. Pierre, can you talk about the state of play there? It sounds like Train 3 is going down, and in the back half of the year, you're going to be running closer to nameplate capacity. But just to talk about maintenance there and where we stand with the project.
Pierre Breber, CFO
Yes, Neil, it's pretty straightforward. We're doing our scheduled Train 3 turnaround; separately, we are doing repairs. We expect that to be completed by the end of this quarter. And then, you're right, we'd be operating all three trains in the second half of the year. There was a short time period in the first quarter where we saw all three trains operating between the train one turnaround and the start of the train three work. So we know what those units can do, and we're excited to get back to it here in the third quarter. Wheatstone will have a planned turnaround late third quarter, early fourth quarter, but again we expect Gorgon to be running full during the second half of this year.
Neil Mehta, Analyst
Pierre, you guys have been really good at M&A—being opportunistic, willing to step away when the bid went away from you and taking in assets like Noble towards the bottom of the cycle. It’s a core competency for Chevron. As you look at the landscape, how do you think about M&A and whether there are opportunities out there and how are you evaluating that?
Pierre Breber, CFO
Neil, we're really happy with the Noble acquisition. Again, if we step back and think of July, it was still an uncertain time. By being the first to announce that major transaction, closing first in October, and now having two quarters where we've been integrated, I see everything we said: the free cash flow accretion, the returns accretion, the earnings accretion. The synergies doubled from $300 million to $600 million; we've achieved 80% of them, and we'll get the rest before the year-end. I'm very happy with the talent from the Noble employees that have come across, particularly in the DJ basin and the Eastern Med. So, what was a very good deal looks even better now. Now, look, it’s a challenge to replicate that; we will always be looking. We have a very high bar. Noble met that bar with the quality assets and the value that we saw. We don't need to do an acquisition to sustain Doug's earlier question. We are sustaining and growing this enterprise. I'm very cognizant of that. Again, we need to do that to sustain and grow the dividend. At the same time, there are times when inorganic growth can enhance the company. So, if we see something that will make that Investor Day story we told even better, then we'll pursue it. I do think industry consolidation will continue. Undoubtedly, valuations have moved from back where we were in July. We know it's a long game, and we're very patient. Again, we don't need to do a transaction.
Operator, Operator
We'll take our next question from Paul Cheng with Scotiabank.
Paul Cheng, Analyst
Pierre, two questions. First, among your peers I think you have probably the happier concentration in California. And with the governor's latest proposal, how might that impact your overall operation or how you may restructure? Do you need to restructure yet, or if you do? I want to see how you’re thinking about the policy impacting your business in California, both in the downstream and upstream. The second question is, if we look at some of the smaller operators, in the last 12 months, I think one of the movements has been into variable dividends, which is never attained for the major oil companies such as you guys. You’ve always used share buybacks. So just curious if internally the board and management have considered the variable dividend versus buyback to see which is a better way to return cash to shareholders.
Pierre Breber, CFO
I'll answer your second question first. Of course, we pay close attention to what everybody does. We have not been convinced that there's a better cash return story than what we do, which is a steadily growing dividend. Again, with a 4% increase, we announced our 34th consecutive year of growing dividends, a 7% compounded rate for the last 15 years, and a ratable buyback program, 13 out of 17 years very close to the actual ratable price during that whole time. We talk to our shareholders all the time. I think our shareholders support our framework, but of course, we'll keep an open mind; we don't see the value in it. Look, I think those approaches are gaining favor, in part because dividends have been cut by other companies and other actions that have not been as consistent and predictable as what we've done over that track record of 34 years on the dividend and 17 years on the buyback. If we go to California policy, I'm not sure exactly which one you're referring to. There's an internal combustion ban or a rulemaking proposal to reduce that. But I think by 2035 there's also a governor request for rule makers to look at rules on hydraulic fracturing. What I can say is that certainly on hydraulic fracturing, it has been done safely in California under comprehensive regulations for a long time. It’s been done safely elsewhere in the United States and safely all around the world. And I think when policies restrict supply, it just moves energy production to jurisdictions that likely have less regulation, and it also moves the jobs and the government revenues and increases the trade deficit. I'll say that jobs in oil and gas are good-paying jobs you can raise a family on. So in terms of our operations, if some sort of hydraulic fracturing ban was implemented through the rulemaking process, it would not be material to Chevron's upstream operations in California. It impacts future drilling at a field that represents less than 10% of our production. Of course, we'll work with Governor Newsome to make those rules— as you know—advance the environmental objectives while continuing to support the jobs and the economic benefits of our industry. In terms of any kind of internal combustion engine ban, what I’d say is we support the Paris Agreement. We support a price on carbon. Light passenger vehicles represent less than 10% of global greenhouse gas emissions. So, let's make sure we also focus on the other 90%. But if you want to look into EVs and transportation, put a price on carbon and let the technologies compete in the marketplace.
Operator, Operator
We'll go to Ryan Todd with Simmons Energy.
Pierre Breber, CFO
Could we go to the next caller please?
Roger Read, Analyst
A couple of things, I'd like to follow up on—more look back and look forward. Gorgon in the first quarter, we had some fairly significant gas prices; you're typically more contracted than the spot market. I was just wondering how that performed at a time where you probably weren’t able to participate much in the spot market? It was just curious how you covered the contracted side and how you think about that a little bit going forward. And then the other question I had hasn't gotten much play recently, but as part of the curtailments within OPEC+, how is the neutral zone restart going, and what are the impacts for you?
Pierre Breber, CFO
Sure. On Australia, we've said that with one train down at Gorgon, which has been largely the case since mid-year last year, we think of our Australia system having five trains and so four out of five trains have been operating— that lines up pretty closely with our contracts. So it’s not an exact match because some of the Wheatstone contracts and Gorgon contracts are a little different. But fundamentally, we are balanced. Yes, the real opportunity costs from the Gorgon downtime were not participating in the spot market. We didn’t get the benefit of a relatively balanced; there were some trading puts and takes, I would say, in the LNG spot market, but nothing worth pointing out. In terms of the Neutral Zone, that ramp up continues very well. It’s at 60,000 barrels a day. Our share pre the shutdown was about 80,000. So we expect to get there here during the course of the year. Of course, any OPEC+ curtailment at this point in time isn’t being curtailed; that’s really subject to the local governments.
Operator, Operator
We will go next to Manav Gupta with Credit Suisse.
Manav Gupta, Analyst
Hey, guys. I just quickly want to focus on two questions on the California project. The first one is, because you are sequestering and storing in California, does that mean that on top of IRS 45Q credits, you also get the LCFS credits? Because if you're not storing in California, as I understand, then LCFS is not available. And the quick follow-up there is: why almond tree? Is it only because the carbon intensity is minus 80? Or is it also because it's just you and one more guy chasing that feedstock? So what we're seeing in the soybean oil market doesn't replicate.
Pierre Breber, CFO
Yes. Let me just step back for a moment. Just remember, we're just talking about transportation. That's the fourth largest source of greenhouse gas emissions globally, right? The first is manufacturing, the second is power generation, third is agriculture and land use, and then the fourth is transportation. So agriculture and land use is an important source of greenhouse gas emissions. You’ve seen our work in renewable natural gas, which again captures methane from dairy cows, and that’s a worthwhile area for us to explore. The agricultural waste is just—what happens is it gets burned, and those emissions go to the atmosphere. So partnering with Schlumberger and Microsoft, that’s a worthwhile project to capture emissions that would otherwise be released to the atmosphere and convert and sequester them, essentially to generate some excess power. So, it’s early days; you’re right. It’s all policy-enabled, including federal policy and California state policy. We’re doing the front engineering and have a lot of work to do. But I think you’re getting the right idea—we're looking for projects that provide higher return and lower carbon. So this is a project that can generate a return with policy support and reduce carbon.
Operator, Operator
We'll go next to Ryan Todd with Simmons Energy.
Ryan Todd, Analyst
Sorry about that, my phone, the call dropped right as you were asking me a question. If I could follow up on one of the earlier questions regarding the research into the buyback, you walked through two things that you needed to see: sustainable excess cash flow generation and a strong balance sheet. You mentioned that near-term cash goes onto the balance sheet; is that because it's just the place to hold the cash while the sustainability gets to a level of confidence that you're okay with, or is that because you need to strengthen the balance sheet a little more before you restart the buyback?
Pierre Breber, CFO
It's a bit of both. I mean, it’s just how the math works, right? If you have excess cash, and you don't change your capital program, the dividend will just increase, so that's not going to change. So just by definition, it goes to the balance sheet. But it also, I think you can infer in my comments, that again, we're looking at future excess cash generation and the strength of the balance sheet to weather the commodity price cycle. So I'm not going to give you a hard target. We're going to use judgment because there's judgment on future excess cash generation, and this is our first quarter actually with current excess cash generation. We expect the next couple quarters to be potentially even better because you've got oil prices above $60, refining and chemicals margins much stronger. So it could be even better. At the same time, we don't have a sustained global economic recovery. So it’s reasonable for us to be cautious; we want to be confident that when we start the program, we're going to continue it for multiple years. We can sustain it through an oil price cycle. I know that folks want a formula or a trigger; I know some of our competitors have those numbers. We're going to use judgment, and we're considering what we see in front of us in terms of the likelihood of future excess cash generation. We're going to want the balance sheet in a strong enough position that if oil prices cycle down, we can continue the buyback program. Our balance sheet is very strong right now; but yes, in the short term, excess cash is going to go to the balance sheet. That’s kind of by definition, but it also serves a dual purpose of lowering our net debt ratio and putting us in a better position when we start, if and when we start a buyback program.
Ryan Todd, Analyst
Thanks. And then, maybe on a separate topic, if we talk a little bit about refining. I know you don't comment on news headlines. You mentioned recently in a news article connecting to a potential refinery acquisition in the U.S. northwest. You did acquire a refinery in recent years. Can you talk about how you think about your portfolio exposure on the downstream side in general, your appetite for increasing or reducing that exposure in any way, and how your general view of the refining outlook over the medium term may play into how you look at managing your portfolio?
Pierre Breber, CFO
Yes, so again, I won’t comment specifically on that report. The refinery in the Gulf Coast was a very small acquisition that we made; it was something that I had foreshadowed. I was leading the business at that point in time because we'd only had one refinery in the Gulf Coast region, and we were, I think, the only major company with that setup. We did not— we were on the eastern side of the Gulf Coast in Mississippi, and our retail in Texas was supplied by third-party barrels. We’d talked about that; we didn't have to do that. But when the opportunity came, that transaction is working as we envisioned. So on the West Coast, we're in a much different position. We have a two refinery system; we have a leading brand and strong infrastructure. We're even growing a little bit in Mexico; some of our retail volumes there. So I’d just say we're in a strong position on the West Coast. And in the Gulf Coast, we're also strong; we felt we could make us even better by getting something on the eastern side and the Texas side. And we did that. So I wouldn’t read too much into it. We did make a small acquisition in Australia’s retail fuels, which again was enabled our value chain out of Asia. There's been some very targeted, modest acquisitions in the refining business and retail business. But for the most part, we have a focused geographic footprint in a very competitive business. As we look forward, it's going to get better; Winter Storm Uri, as difficult as that event was for everyone in the region, has actually tightened inventories for fuels and especially for chemicals. So those margins have recovered a little more quickly than they otherwise would have, and we think the next couple quarters are going to be good. We’re well-positioned in our downstream and chemicals business.
Operator, Operator
We'll take our next question from Jason Gabelman with Cowen.
Jason Gabelman, Analyst
I guess following up on the downstream, since that’s being discussed. Can you just comment on specifically your markets; you're focused on California and kind of the Asia Pacific region? It seems like vaccine deployment and return to normalcy is kind of lagging there. So when you look across your portfolio, do you see different pace of margin improvement and return to normal? Do you expect your refining results to reflect that throughout the year? And then, secondly, on the Toyota MOU you announced, there was a comment in the press release mentioning that the MOU in the pursuit of hydrogen will leverage existing market positions and assets that Chevron has. Can you elaborate on that comment a bit? What market positions or assets are—or at least the types of market positions and assets that the MOU will leverage? Thanks.
Pierre Breber, CFO
Yes, Jason, I'll be real quick on the second one because it’s early days; it’s an MOU, it’s really to explore this alliance and work together to grow the hydrogen business in passenger vehicles and heavy-duty applications. You'd expect that the focus would be around California, which makes sense. And the reference to assets is like hydrogen, fuel dispensing at some of our service stations. So that’s the comment—more to come. We’re very excited to partner with a great company like Toyota on the fuel cell technology, and you’ll hear more over time. In terms of the regional differences, you’re absolutely right; there are regional differences. If I contrast first West Coast and Gulf Coast, actually the Gulf Coast is a little bit stronger; Florida looks really pretty much back to normal. West Coast, on track with gasoline and diesel really has come on strong. Now, the Southern California resurgence, earlier this winter has worked its way through; the rates are very low. You’re seeing that come back to travel strong again in the Gulf Coast region, and seeing it come back in California. The big airports in San Francisco and LA are so heavily dependent on international travel that it clearly is lagging. Hopefully, it’s coming soon after domestic travel; we saw the announcement in Europe that fully vaccinated Americans could go to Europe this summer. So we’ll just see, hopefully, not too far behind. We saw in China and Australia that domestic travel fully recovered once those countries got their arms around the virus. So I’m confident domestic travel will come back very quickly here in this country. But again, international travel will lag a little bit, and we’ll just see. Well, in Asia—that's a big region—it varies. Some countries have much better control of the virus than others. The excess of new refining capacity in China becomes relevant there. So the U.S. has strengthened for sure, as I said earlier, and with Winter Storm Uri, you're seeing that in petrochemicals too. I do think the second quarter and third quarter are going to look better. It is a global market, so these markets do stay connected. Asia has also recovered somewhat, and we’ll see where the results are over the next few quarters.
Operator, Operator
We'll take our next question from Sam Margolin with Wolfe Research.
Sam Margolin, Analyst
So I just have one question. I want to revisit this reinvestment topic because it seems pretty influential right now. So as you know, you field a lot of questions about your organic maintenance capital, and then anything inorganic is supposed to be accretive to some metric, whatever people choose. But I think it is fair to say that with Noble, what we're seeing is a flexible strategy for reserve and production management. If you're generating surplus cash, you're building capacity for inorganic ads to manage sustainability, and we should think about it as kind of a multifaceted approach instead of this siloed point of view that that people seem to be shoehorning you into. Is that fair?
Pierre Breber, CFO
I think so, Sam. Yes. I mean, when we look at just the organic capital and you say, again, we were $13 billion and some change last year—$14 billion—and we had planned to be at $20 billion each year pre-COVID. You look, you make that comparison, but to not include the inorganic seems to not tell the whole story. I think you saw that in a lot of reserve replacements and other numbers. You saw that in our Investor Day; our ability to basically get pretty close to the same production guidance five years out this year versus where we were last year is a reflection of greater capital efficiency but also the Noble transaction now. So I agree with you. Whether we do that again or not, that's a separate question. We don't have to do that; we can sustain and grow the enterprise with our sustaining CapEx on the upstream side, excluding exploration, how we've defined it is about $9 billion. So we are above that. Of course, we're investing in Tengiz, which we know will result in higher production and much stronger, higher cash flow. So again, we showed free cash flow growing 10% per year. So I do understand all the questions; I think you are hitting it—it is a little bit focusing on half of the story. You’ve got to look at the whole story. Of course, we're managing the whole company, and again, keeping an eye on long-term value.
Operator, Operator
We will take our last question from Neal Dingmann with Truist Securities.
Neal Dingmann, Analyst
Two things: one, you haven’t talked, and I don’t perceive this to be an issue but because based on your costs, I’m just wondering, are you certainly concerned? Just if you would talk a little bit about OFS potential inflation, both domestic and international? And then, same sort of thing around any raw materials shortages and maybe include personnel there.
Pierre Breber, CFO
Yes, short answer is we’re not seeing anything at this point in time; lots of talk about it, but we are not seeing requests for price increases for that. In terms of inputs, certainly, steel prices are up; that would flow through to our wells and the tubulars. We are seeing impacts more on the downstream; there are trucker shortages. That, in terms of personnel, we’re seeing that I think that's in part the Amazon effect and all the delivery, UPS, and the rest pulling a lot of truckers off. We think that will work itself out. Those are pretty minor and targeted in terms of general oil field services inflation, we’re not seeing it here in the U.S. or internationally. But we’re cognizant; oil prices are higher, and we're certainly hearing the top; just not seeing it on the ground.
Neal Dingmann, Analyst
Okay. And then, just lastly on—you talked about the new decarbonization projects in California. I just wondered, as you transact and sort of jump into more of those, is that going to be more sort of return-based, or what is sort of driving as you see opportunities in that? I just want to maybe from a broader standpoint ask.
Pierre Breber, CFO
Yes. We're very clear that our message and our goal is higher returns, lower carbon. And that's true in our conventional business; that's true in M&A and how we walked away from Anadarko and how we did the Noble transaction. And that's true in energy transition. When you look at hydrogen and carbon capture, you're reviewing those as growth businesses that can do both higher returns and lower carbon. There are other parts of our energy transition strategy that lower carbon from our operations, which I mentioned earlier, increasing renewable products. All of those also need to generate returns. So we're very clear that what we do in the space has to be good for the environment and good for shareholders. So far, we’re able to accomplish both, and we think activity will increase going forward.
Roderick Green, General Manager of Investor Relations
Thanks, Katie. We would like to thank everyone for your time today. We appreciate your interest in Chevron and everyone’s participation on the call today. Please stay safe and healthy. Katie, back to you.
Operator, Operator
This concludes Chevron's first quarter 2021 earnings conference call. You may now disconnect.