Earnings Call Transcript - CVX Q3 2022

Operator, Operator

Good morning. My name is Sarah, and I will be your conference facilitator for today. Welcome to Chevron's Third Quarter 2022 Earnings Conference Call. As a reminder, this conference call is being recorded. I will now turn the conference over to the General Manager of Investor Relations of Chevron Corporation, Mr. Roderick Green. Please go ahead.

Roderick Green, General Manager of Investor Relations

Thank you, Sarah. Welcome to Chevron's Third Quarter 2022 Earnings Conference Call and Webcast. I'm Roderick Green, GM of Investor Relations. Our Chairman and CEO, Mike Wirth; and CFO, Pierre Breber, are on the call with me. We will refer to the slides and prepared remarks that are available on Chevron's website. Before we begin, please be reminded that this presentation contains estimates, projections, and other forward-looking statements. Please review the cautionary statement on Slide 2. I will now turn it over to Mike.

Michael Wirth, CEO

Thank you, Roderick, and thanks, everyone, for joining us today. We continue to see a challenging and dynamic macroeconomic and geopolitical environment. Current events highlight the importance of balancing economic prosperity, energy security, and environmental protection. In line with these three imperatives, Chevron remains focused on our objective to safely deliver higher returns and lower carbon. During the third quarter, we continued to make progress by delivering return on capital employed in the mid-20s, returning more than $5 billion to shareholders for the second quarter in a row, and investing to grow both our traditional and new energy businesses. Earlier this week, we released our methane report with specific disclosures about our aim to be a leader in methane emissions management. Our goal is simple: keep methane in the pipe. I encourage you to read our report available on chevron.com. Our strategy remains clear and consistent. Our results keep getting better. While future market conditions are uncertain, we're well positioned to deliver value to our shareholders in any environment. With that, I'll turn it over to Pierre.

Pierre Breber, CFO

Thanks, Mike. Third quarter financial results were strong. Included in the quarter were $177 million of pension settlement costs and positive foreign currency exchange effects of $624 million. The appendix of this presentation contains a reconciliation of non-GAAP measures. We repurchased shares at the high end of our guidance range and ended the quarter with a net debt ratio under 5%. Cash CapEx was $3 billion, up over 50% from last year. For the sixth consecutive quarter, Chevron's free cash flow exceeded $5 billion. We're on track to beat 2021's free cash flow record. Adjusted third quarter earnings were up more than $5 billion versus last year. Adjusted upstream earnings increased mainly on higher realizations, partially offset by inventory timing impacts. In Other, tax benefits are more than offset by higher operating expenses and other costs. Adjusted Downstream earnings increased primarily on higher refining margins and favorable inventory timing impacts. The planned turnaround at our Richmond refinery was a driver of higher OpEx and lower volumes for the period. In Other, lower chemicals earnings were partly offset by higher trading gains. Compared with last quarter, adjusted earnings were down modestly. Adjusted Upstream earnings increased primarily on higher liftings and tax benefits, partially offset by higher charges for abandonment accruals and exploration leases. Adjusted Downstream earnings decreased primarily on lower refining margins and lower volumes and higher OpEx due to the Richmond planned turnaround. Partially offsetting is a favorable swing in timing effects. Third quarter oil equivalent production was flat compared to a year ago. Growth in the Permian, along with the absence of turnarounds and Hurricane Ida impacts were offset by the expiration of our contracts in Thailand and Indonesia and the sale of our Eagle Ford asset. Now looking ahead, in the fourth quarter, we expect a modest turnaround. After producing a record number of LNG cargoes in the third quarter, we expect fewer spot cargoes out of Australia due to maintenance and summer temperatures. In the third quarter, we received a dividend from Angola LNG. In the fourth quarter, we expect dividends from TCO and Angola LNG, and we expect to end 2022 at the top end of our full year guidance for affiliate dividends. As a reminder, Chevron pays a 15% withholding tax on TCO dividends that lowers earnings and cash flow. In the fourth quarter, we will pay over $700 million associated with the early termination of a long-term LNG regas contract at Sabine Pass. This payment was accrued previously through working capital. Also, we expect to buy back shares at the top end of our guidance range. In closing, the third quarter showed again how Chevron's higher returns, lower carbon objective creates value for all of our stakeholders. Back to you, Roderick.

Roderick Green, General Manager of Investor Relations

That concludes our prepared remarks. We are now ready to take your questions. Sarah, please open the lines.

Operator, Operator

And our first question will come from Jeanine Wai with Barclays.

Jeanine Wai, Analyst

Okay. Perfect. Sorry about that. You think I'd have that right by now. Our first question is on U.S. production growth. So either Mike or Pierre, the Permian was relatively flat quarter over quarter, averaged a little under 700,000 a day so far this year. Given industry dynamics and supply chain challenges, can you provide an update on how operations are going? And I guess what we noticed is that with only one quarter left for the year, it looks like you'll be closer to the lower end of the 700,000 to 750,000 guidance range. And so we're just wondering if that's by design or if there are external factors driving that because we also noticed this morning, one of your integrated peers in the Permian lowered their '22 growth expectations.

Michael Wirth, CEO

Yes, Jeanine, year-to-date Permian production is a little over 700,000 barrels a day, which is up about 15% from the first three quarters of last year when it was just over 600,000. We're seeing good growth. For the quarter itself, production was up about 10% at 708,000 barrels a day compared to 646,000 in the same quarter last year. It's important to note that during the pandemic, the number of drilled but uncompleted wells increased because we didn't need to complete wells when demand for production was declining. We continued some drilling, which led to the growth in inventory. As we resumed operations, our first step was to deploy completion crews to bring the DUCs online. This contributed to the production seen in the latter half of last year and the beginning of this year, which may have skewed the perception of growth rate due to this surge capacity. We're now back to normal drilling, and our DUC inventory aligns with our planned expectations. As a result, we are observing production leveling out at a growth rate that is more reflective of the underlying trends. We anticipate being towards the lower end of our guidance range. While we provide a range due to non-ratable bookings from our non-operated joint ventures, we often do not reach the high end. Therefore, we expect to be at the lower end this time. However, we are not changing our guidance for this year or for future projections.

Pierre Breber, CFO

And Jeanine, I'll just add, that low end of the range represents 15% year-on-year growth. So that's very strong growth.

Jeanine Wai, Analyst

Thank you for that clarification. Pierre, regarding your earlier comments, I saw in an article that the 2023 capital expenditures would likely be at the higher end of the $15 million to $17 million medium-term guidance range. There are many factors at play, and I understand you may not be able to discuss everything since you will release more information in about a month. It seems that next year, the most significant factors will include the TCO spending decreasing, which will be partially offset by increased funding for the Permian. Our question is whether capital is trending towards the higher end of that range. Is this primarily due to Chevron responding to the current macro environment, or was this always part of the plan with some inflation contributing to the higher capital?

Pierre Breber, CFO

It was always part of the plan for us to increase investment coming out of COVID, as Mike just spoke about. We're in the final stages of approving our business plan and our capital budget. And as you said, we'll announce that in December. You should expect it to be near the top end of the range, again, consistent with what our plans have been. We're going to increase in the Permian and in other locations. We do have some cost inflation that will contribute to that. We'll share all those details when we announce in December. And that's about a 20% increase in next year relative to where we think we'll end up this year. So year-to-date, we're a little bit below our capital budget on an organic basis. And so that will result in about a 20% increase, which is very, again, in line with our guidance and consistent with increasing investment and growing energy supplies.

Operator, Operator

And our next question will come from Neil Mehta with Goldman Sachs.

Neil Mehta, Analyst

The first question was around Kazakhstan, and Mike, would just love your perspective on how you're viewing the assets out there, both the development of Tengiz? And then as you think through vacating barrels via the CPC pipeline?

Michael Wirth, CEO

Sure. So I'll start with the project. We're on track to complete bulk construction by the end of this year. No change to our cost or schedule guidance; we're 97% complete on construction right now. There's still a lot of work to be done, but the risk and uncertainty are certainly narrowing and the remaining risks tend to be smaller in scale and potential impact. So we're moving into commissioning systems testing and start-up activities. We built a new integrated operations control center that I visited, which is fully operational with systems online. Our drilling program is complete. The final metering station is online. So very good progress on the construction side, and we'll continue to update you as we progress toward WPMP, the pressure management startup indicated right now for the second half of '23 and then the future growth project in '24. On the CPC and the pipeline, there are no constraints on our ability to move barrels on that line. We've flowed everything out that we've been producing. And you've probably seen the media reports that a couple of the single-point moorings are offline right now for some repairs. So the buoyancy system, those repairs are underway and expected to be completed shortly. So at this point, everything is flowing, and it looks like we'll continue to do so.

Neil Mehta, Analyst

And Mike, you spent many years as a down-streamer as well and have great perspective on the global refining system. I don't think I ever thought that the cracks would be up here. So just love your perspective of where we are in terms of the refining market, how do we work our way through the bottlenecks that seem to be existing in the system and what that means for your Downstream business?

Michael Wirth, CEO

Sure. It's been an interesting couple of years in the refining sector, Neil. With COVID, we actually saw through that period of time, some refineries shut down around the world that maybe at a rate greater than we would have expected before as the economics really collapsed, as demand collapsed. There have been some refineries in the U.S. that have been taken offline after storm damage or operating incidents that are not coming back. We see others being converted to renewable diesel. And so you had a constraint or a reduction in refining capacity that occurred over the last couple of years in a way we really haven't seen previously. And the other thing that happened is some of the new builds that are in various stages of development, primarily in the Middle East or Asia, slowed down during COVID. A lot of the industry slowed activity until we had a better view on how we were going to come through that period of time. I think those will come back into developments and eventually come online which will ease some of these global constraints. But the system is tight right now. And what you see is when you have some maintenance that runs along, some unplanned events, as we've seen on the West Coast, or when you see things like the strike that we've seen in France here recently, markets tighten up really quickly. And that sends a price signal to try to bring supplies in from further away. So the entire refining complex right now is a little more tightly balanced than it historically has been. And I think in the short term, if you want to call that the next year, plus or minus, probably stays that way, maybe a little bit longer to some degree. Then I think as you see some of this new capacity come online, we get back into a situation where it's not quite as finely balanced as it is today. But no doubt, we're in a market that we really haven't seen probably in my career in terms of the overall tightness on supply and demand.

Operator, Operator

And our next question will come from John Royall with JPMorgan.

John Royall, Analyst

Just thinking about your buyback range, $5 billion to $15 billion. 3Q was a strong quarter from a fundamental perspective, but maybe feels more repeatable to me than as an upside case than 2Q did. In 3Q, you still generated free cash flow well in excess of both your dividend and the buyback at the top end of the range. So my question is do you think you could go further than the $15 billion at the top end, given you still have a good amount of deleveraging happening at this point in the cycle? It doesn't seem quite as extraordinary as 2Q did.

Michael Wirth, CEO

Yes. John, we've actually increased our rate of buybacks three times this year. We announced the first one at the end of last year. So we've steadily moved the range up and the rate of repurchases up. And so we're at an all-time high in terms of the rate of share repurchases. And you're right. We've got strong cash flow right now, which allows us to support all of our financial priorities and maintain the strong balance sheet. I think the thing that I just would reemphasize is we want to maintain the buyback program throughout the cycle. And we're not procyclical. We're not countercyclical. We want to operate across the cycle so that our shareholders see consistency out of us and know that they can count on that. And so we're positioned in a way where we're confident we can maintain that. We regularly reassess it as our view on our business and commodity markets continues to evolve. And so we'll continue to do that and apprise you of anything further. Pierre, do you want to add anything to that?

Pierre Breber, CFO

I'll just point out that we increased our dividend 6% earlier this year. We've been growing our dividend at a compounded annual growth rate of 6% for 15 years. That is our first financial priority. So there's a lot of tension on the buyback, but it's clearly our fourth priority after sustaining and growing the dividend, investing to grow both traditional and new energy businesses, maintaining a strong balance sheet. As Mike said, we intend to do it across the cycle for multiple years.

John Royall, Analyst

Great. And then just looking at your bridge for international upstream, and I think Pierre may have mentioned in his remarks as well. You have this tailwind about $300 million from tax. Is that an impact from country mix? Or are there other moving pieces we should think about there? And should we think about this as sustainable?

Pierre Breber, CFO

In terms of international upstream, the benefit in the third quarter was primarily around record LNG cargoes out of Australia, primarily Gorgon and Wheatstone, and we're very happy to see that. It was a time when the world needed the energy. Again, a lot of that is under long-term contracts, but that included cargoes in the spot market, which we know are at high prices. So we signaled that we expect fewer LNG cargoes in the fourth quarter because during the summer temperatures in the southern hemisphere, you just produce less. We do have a pit stop that is planned for one of our facilities. In terms of tax items, those are items that can be onetime in nature. So I would not look for those to be necessarily repeating.

Operator, Operator

And our next question will come from Roger Read with Wells Fargo.

Roger Read, Analyst

I have a question related to the Permian, specifically regarding the lower end of the non-op portion and the CapEx discussion. I'm interested in your thoughts on inflation, not just in terms of pricing but also the productivity challenges that arise when operations increase. Given your strong global presence, how would you describe the current situation? Is it becoming increasingly difficult to address these challenges?

Michael Wirth, CEO

Yes, Roger, I want to emphasize that we plan our work and execute our plan. If we look back to pre-COVID, our trajectory shows we've largely maintained our course despite the disruptions caused by COVID. In terms of securing rigs, completion crews, pipes, sand, and other resources, we typically have good long-term visibility. We engage with our service providers early, which helps ensure the quality and availability of personnel and equipment. Therefore, we don’t anticipate any significant constraints on our ability to carry out our plans. We are experiencing some cost inflation, particularly in the Permian, where the increase is likely in the low double digits year-on-year. In other areas of our portfolio, cost pressures are somewhat less intense and the constraints are not as urgent. You may notice some of this reflected in our capital guidance as we finalize our planning for next year. I believe this cost inflation is a genuine constraint on the industry’s activity pace as we move into the next year. Others will share their perspectives on this matter, but it is indeed a significant challenge. We've encountered similar situations before, notably in the Permian and oil sands a decade ago. This is part of operating in a cyclical business.

Roger Read, Analyst

Yes, definitely. As a follow-up, regarding renewable natural gas, we recently saw a significant acquisition in that sector. Your company has been a leader in this area. I was wondering if you have any updates on the developments related to federal legislation and the impact of the LCFS in California. One aspect mentioned in the acquisition was the existing position of that company regarding leaseholds on landfills. Can you describe your current situation in relation to your goals and how it compares to where this competitor is establishing itself?

Michael Wirth, CEO

Sure. We feel very good about where we are. We're a leader in RNG, leveraging strengths across the entire value chain, from feedstock to customer. We've been a partner of choice for a lot of the dairy farmers. We've got a strong brand to pull through. We've got a really strong market position in California where the LCFS provides the strongest incentives for this. So we like the position that we've built up. We've got 75 CNG sites online or in progress right now through the retail side. So our efforts, we were an early mover, and we've preferentially focused on dairy as opposed to landfill gas. So there certainly are others that are active in this area. I don't want to comment on how somebody else looks at things. I would just say, our business is up and running, and we're supplying customers today, not planning out into the future and banking on that. We intend to grow it further, but it's a real business for us today, and it's performing well.

Operator, Operator

Our next question will come from Devin McDermott with Morgan Stanley.

Devin McDermott, Analyst

So I wanted to stick with New Energies first. A few weeks ago, there was an announcement that you joined a consortium to look at a hydrogen and ammonia project in the Gulf Coast. So I was wondering if you could talk in a little bit more detail around that. And then more broadly, with the Inflation Reduction Act passage, how you're thinking about the opportunity set in your New Energies platform over the next few years?

Michael Wirth, CEO

Sure. So we're excited about the announcements to work with a number of really good partners to try to develop hydrogen opportunities there on the Gulf Coast. One of the things I think you're going to see in these New Energies businesses as they evolve is we're going to have to build entire new value chains. That means we're going to partner with different people who have expertise in different parts of these value chains and can bring technology, can bring customers, can bring experience to a venture that no one company necessarily would have all of that. Collectively, we can work with people that can build these new value chains. It's early days on many of these things; we're studying all the different opportunities in terms of blue hydrogen, green hydrogen. There are a lot of different colors that are possible as you get down into the details of it. It will require significant investments. So I don't want to get ahead of ourselves here. This is to really develop well-informed perspectives on the investment opportunities, the business models, and ultimately, how we would build the business up there. But it's exciting. They're high-quality partners that we are working with. I think you'll see more of these efforts announced here. We've got a lot of it that we're working on around the world, not just here in the U.S.

Devin McDermott, Analyst

Great. Look forward to seeing the additional details there over time. My second question is actually on M&A and just consolidation. If you think back over the last few years, you've had a great track record, the Noble deal in 2020, REGI more recently. I wonder if you could talk a little bit more about how you're viewing the landscape for further acquisitions, upstream, downstream, and even New Energies going forward.

Michael Wirth, CEO

Sure, Devin. So we're always looking. We've got an evergreen process where we scan all the different sectors that are of interest to us. We watch companies, we watch sectors, we watch opportunities. Although we've had a pretty high bar, which is why we've only done a few deals. As you say, we feel like the deals we've done are likely to turn out well. We've got a strong portfolio, a really strong base case. We don't need to do a deal unless it really improves on what we expect to deliver otherwise. I would just say we're going to continue to be very disciplined. We don't have an open checkbook even when times are good like this, especially when times are good like this. We walked away from a deal a few years ago rather than chase value out of it. We've sold assets out of our portfolio at opportune times. As you say, the last couple of deals were done at a pretty good time. Over time, I think in the oil and gas business, there's likely to be some more consolidation. You need fewer and stronger companies, and that normally happens at the bottom of the cycle rather than at the top of the cycle. In New Energies, there's a lot of activity, and I think there's a very active market out there where you could see some combinations come together because nobody has all the pieces. It's likely that combinations are necessary to build those businesses. We're going to be disciplined as we have been all along. If we do anything, we'll come out to explain to you how it's going to create value for shareholders.

Operator, Operator

And our next question will come from Doug Leggate with Bank of America.

Doug Leggate, Analyst

Mike or Pierre, I have a question for each of you, starting with Pierre. You both have made it clear that you're managing the buyback throughout the cycle. It seems we can all agree that your breakeven point isn't among the best in the industry. However, you're still generating significant cash, and your share price is nearing an all-time high. I'm curious, the last time you faced a similar situation, you had several projects underway to maintain a nearly zero net debt balance sheet. What prevents you from accumulating cash on the balance sheet and taking advantage of opportunities, whether through mergers and acquisitions or buying back shares when prices are low? I'm interested in your thoughts on this.

Pierre Breber, CFO

We've had a philosophy that goes back a long time and a track record. Again, I think that speaks for itself, 35 years of dividend increases, compounding at 6% for the last 15 years. Our investments in our traditional new energy are growing; both our guidance on upstream production growth is 3% compounded. We're now the second-largest bio-renewable diesel producer in the country with our REGI acquisition. When we generate cash in excess of that, it first goes to the balance sheet. We’ve been clear about our stated net debt ratio being between 20% to 25%. That's still a very strong balance sheet. If you recall, as we entered COVID, we were the only company that showed a stress test at $30 Brent, and our net debt ratio was going to go into the low 30s if we would have had two years at 30. But that would have been where many of our peers started into COVID. We've always maintained a strong balance sheet, and we think that's appropriate over the cycle to be in that range. But we're well below that. Our net debt is under 5%. So that's just a function of cash coming in and our commitment to not be procyclical; we could have a larger buyback program today. Absolutely, if we wanted just to peg our net debt ratio at a higher level. I think our shareholders would appropriately question that strategy as not being across the cycle. So we're setting the buyback at a level that allows us to maintain it across the cycle when prices do correct. We'll continue to buy back shares near the top end of the range that we've been talking about. In terms of acting countercyclically, in terms of M&A or any kind of major capital project, we have the capacity to do that at all times. We've shown that on M&A; we use equity because we think it makes a lot of sense. There's oil price risk in any kind of transaction, so we don't need to do it all with cash. It will come with debt very likely. We want to have some capacity, but using equity in oil deals makes a lot of sense. Again, we have a great portfolio of projects, but we've shown a 10-year profile in addition to our 5-year guidance where the growth continues. We have many great projects to choose from. The goal is to sustain and grow the enterprise with the lowest capital possible. We're more capital and cost-efficient than we've ever been. We've talked about that. We're not really paid for growth by the market, so we're growing at very appropriate rates, strong rates for the next five years. We've shown beyond that, but we certainly have the balance sheet and the capability to do more if it's in the interest of our shareholders.

Doug Leggate, Analyst

Mike, I hate to put you in the spot, but you have the privilege or the challenge, I guess, of meeting with administration recently. I asked this question to your larger peer earlier today. I'm curious if you would care to share your thoughts on some of the potential legislative risks that might face the industry. At a big picture level, I'm curious whether you feel that the kind of ESG pendulum from an investor standpoint is beginning to swing back in your favor? Just any thoughts you may care to share on that.

Michael Wirth, CEO

Sure, Doug. When we meet with policymakers, including those in the administration, I talk about the importance in energy of balancing economic prosperity, energy security, and environmental protection. All three of those things matter. Economic prosperity is affordable energy that underpins the ability of economies to thrive. Reliable energy is tied to national security, and we're seeing that play out in different parts of the world today. Then, of course, there are the concerns about the environmental impacts of energy production and energy use, and we have to take those very seriously as well. My message to the policymakers is to be sure that we consider the appropriate balance of all three of those in policy because if you over-index on just one, you can create unintended consequences and vulnerabilities that may not manifest themselves for a little while, but they're there. They eventually materialize. I'm a believer that we share a lot of common ground with governments around the world as we talk about these issues. We share common ground with our investors who are concerned about these things as well. We've been doing ESG for a long time. I keep a book on my desk called the Standard Oil Spirit that was written in 1923. It talks about our commitment to people and protecting the environment. This has been in the ethos of the company forever, and it's evolved as society has evolved. We're committed to being a responsible company and being a part of the solution here in the U.S. and around the world.

Operator, Operator

Our next question will come from Ryan Todd with Piper Sandler.

Ryan Todd, Analyst

Maybe one follow-up question on biofuels, on the liquid side of the biofuels market. Could you maybe provide an update on how you're seeing the liquid biofuels market maybe relative to your expectations, particularly with a little time with the REG acquisition under your belt? You're expanding pretreatment in Germany, Europe pitching things towards sustainable aviation fuel. So how is the market playing out relative to your expectations? How do you see the past issue playing out between U.S. and Europe? Any update on the progress of the Geismar renewable diesel facility that you acquired from REG?

Michael Wirth, CEO

Sure. I'll start with the REG acquisition. The assets are good; the people are even better. Any surprises so far have been to the upside. We've already identified quick wins, commercial opportunities. We've lowered insurance and financing costs. Integration efforts are all on track and delivering on our expectations. We're seeing placement of biodiesel in Chevron's West Coast refining or in the marketing network, and that continues to ramp up. We're optimizing freight and feedstocks across the system. All of that builds on the strength that both companies had in the renewable fuels value chain. We see it as a really nice combination. The Geismar expansion is underway, and we're halfway already to our renewable fuels target as that's completed. We indicated we're going to grow to 100,000 barrels a day, and we're well on our way to do that. Of course, we're investing in other relationships. We've got a joint venture with Bunge, where we're now participating in the soybean crush spread and bringing feedstocks into the system. We're working on converting hydro processing capacity at some of our refineries to be able to run bio feedstocks. This is a part of our business that will grow; the economics on it are, like anything in the downstream, a function of feedstock costs, supply-demand in markets. But they've been good so far, and we expect across the cycle that they will continue to be an important part of our portfolio. We are seeing more people go into renewable diesel. It's a market that like any other commodity market may get long, and margins may reflect that. But we're familiar with those dynamics from our traditional business.

Ryan Todd, Analyst

Thanks, Mike. Maybe one more. Just maybe a little speculative, but any thoughts on what you think the impact of a Russian product import ban on Europe could play out in terms of product flows? Are those barrels likely to find a home in Latin America or Africa? Or do you think that we may actually see a decent amount of that Russian product disappear from the market?

Michael Wirth, CEO

Yes. Any of these export bans have to be looked at within the context of the broader market. As you say, just as we've seen on crude, the U.S. has managed the import of Russian crude; Europe hasn't yet and that's coming. But it's a global market. You've got other buyers that need those products and they're not participating in the sanctions necessarily. As we've seen here recently, markets are tight right now. Diesel, in particular, is likely to stay that way through the winter, I think. Further, we get into the first quarter when the products ban comes into effect in Europe. It will be set against a backdrop of pretty tight product markets, and countries around the world need that fuel. You get into logistics then; you've got longer shipping legs. Do you have enough ships to move it? How does the system reoptimize? It's a less efficient optimization for sure than moving it to the natural closer markets. I do think you'll see those products continue to flow, although just go to more distant markets with increased costs and logistics and continue to keep some of this pressure on the overall balances out there.

Operator, Operator

And our next question will come from Lucas Herrmann with Exane.

Lucas Herrmann, Analyst

Two, if I might. The first for you, Pierre. Just remind me, in terms of the associate contribution towards the top end of the range, I think the indication was $3 billion at the top end of the range, but perhaps you could give us an indication of the level of dividend that's been paid out to associate to date. I guess I'm a little surprised that in the current environment, one might expect that the associate dividend would be beyond the $3 billion? And then, Mike, just if you could just give us a whirlwind tour or it's not whirlwind, just talk around the Gulf developments that are taking place there within your own portfolio and how those are proceeding and your current thoughts on timing. That'd be great.

Pierre Breber, CFO

Lucas, you're right that affiliate dividends last quarter, we guided to be above the top end of the range, and now we're guiding at the top end of the range, which we increased during the course of the year. That reflects really two items. Angola LNG has, in the affiliate income line, been generating earnings all year, but during the first half of the year, the cash return was a return to capital and a dividend. It's showing up in a different part of the cash flow statement. The second item is, given the uncertainty at CPC, TCO is holding more cash. We'll get more cash out of TCO. But TCO is appropriately being cautious. As Mike said, all of our barrels are flowing. In October, we expect them all to flow. In November, we expect the repairs to be completed shortly. That said, they're just being cautious and holding a little higher cash balance. We'll be at the top end of the range through 3Q, I think we're at about $2 billion of affiliate dividends. You can confirm that with Roderick. The reason why you're seeing the cash flow line of affiliate income less dividends being a little bit larger than maybe you'd expect is primarily those two drivers in terms of Angola LNG accounting and TCO holding cash balances.

Michael Wirth, CEO

Okay. Gulf of Mexico, Lucas, as you know, we're one of the largest leaseholders in the Gulf. We've got over 270 leases out there and a strong base business, a lot of installed infrastructure that enables capital-efficient brownfield development. Importantly, it's one of the most carbon-efficient assets in our portfolio, with a carbon intensity of about 6 kilograms of CO2 per barrel of oil equivalent. Lease Sale 257 is the one that was in question. Here a few months ago, as a result of the Inflation Reduction Act, that's been clarified, and that lease sale is proceeding. We picked up 34 leases in that sale. We look forward to continued leasing by the federal government as indicated and kind of encouraged by the Inflation Reduction Act, and we'll participate in those. In terms of production growth, we will advance a number of projects that are underway right now. Jack St. Malo has a multiphase pumping project that starts up this year and some additional development drilling. Bigfoot has ongoing development drilling and water injection that will begin in the first quarter of next year. Mad Dog 2 is operated by one of our partners, and I would refer you to them for an update on that project. At St. Malo, our waterflood first injection plan is for next year. Anchor is a new greenfield project. We expect first oil on that in 2024. Whale, another greenfield project operated by one of our partners. I expect first oil on that towards the end of 2024. We recently took FID in the second quarter of this year on the Ballymore project and expect first oil on that one in 2025. I appreciate the question because oftentimes, I hear people say, well, we can see the Kazakhstan growth. We can see the Permian. What else do you have? We've got a string of projects in the deepwater Gulf of Mexico that are kind of sequentially lined out that will steadily contribute to production growth here in the U.S. from the deepwater.

Operator, Operator

And our next question will come from Biraj Borkhataria with RBC.

Biraj Borkhataria, Analyst

I've got two left, please. The first one is just going back to Kazakhstan and CPC. My understanding is there's been fortuitous timing for Tengiz because one of the other projects in Kazakhstan has been offline, which has allowed Tengiz to flow despite the capacity obviously being lower. I was just trying to understand, hypothetically, if Kazakh production comes back up to full capacity but the pipeline capacity is maintained to be reduced or is not at full capacity? Then do all the projects get prorated down equally? Or are there any other quirks that we need to be aware of there as it relates to Tengiz? The second question is on your LNG portfolio, performed extremely strong this quarter. Can you say what proportion of your LNG portfolio is sold under long-term contracts? And what portion is sold on a spot basis, either for the year or over the medium term?

Michael Wirth, CEO

Yes. So at CPC, I mentioned earlier that right now, only one of the three single point moorings is operational. The other two are down for some maintenance and repair work that's well underway. We would expect that work to be completed and be able to handle full flows on CPC here before too long. If for some reason that didn't happen, and we were constrained to the one SPM, that has the capacity to load out about 70% of what CPC can move when it's operating full. There would be some constraints on movements. TCO has long been the largest and most important shipper on that line, and that's reflected in some of the practices that I don't want to get into the details, but we would still be able to flow barrels, maybe not all of our barrels. I think TCO would be well positioned to not be disadvantaged, let me say that, if there were some sort of proration underway.

Pierre Breber, CFO

I'll just add that the nominations for CPC for November have already been put in place, and Tengiz TCO essentially got a full nomination even for November. That's even in a situation if the SPMs are not repaired. Of course, if they're repaired by then, fine issue, but even if they stay down for November, TCO has already received a full nomination. On the LNG question, Biraj, it's notionally around 80% contracted, 20% spot. That's a combination of both of our Australia LNG operations and our West Africa operations. Our West Africa tends to be almost all spot, and Australia is closer to 90-10. That averages out to about 80-20. We'll give guidance on our spot price sensitivity during the fourth quarter call at the end of January. It depends on how many spot cargoes are produced out of our West Africa and Australia operations.

Operator, Operator

And our next question will come from Irene Himona with SocGen.

Irene Himona, Analyst

Congratulations on the very strong results. My first question, your financial framework is clearly to manage through the cycle. But at the same time, the current uncertainty on the commodity price outlook is rather extreme, partly due to risks or fears of a recession. My question is, as you look at your Downstream businesses, whether in the U.S. or Asia, have you seen any signs of an economic slowdown that could cause you some concern as you look ahead to 2023, which might perhaps drive a more conservative approach to CapEx growth?

Michael Wirth, CEO

Yes, Irene, thanks. Demand remains pretty strong globally across the product. Now there are some variations in that. Certainly, the U.S. West Coast, which had some refining issues, and prices reflected that. We saw gasoline demand in the third quarter responsive to those higher prices, which resulted in a little bit of softness there. Diesel demand has been pretty strong around the world, maybe a little less so in China, given some of the lockdowns that they're seeing. Aviation demand has been steadily coming back as people are flying again, not quite to pre-COVID levels yet, but steadily increasing. Overall, I wouldn't say that product demand that we've seen to date is sending a strong signal that a recession is underway or that the economy is significantly slowing. As I said, there's always some kind of regional or sectoral unique characteristics. But no, we're not really seeing that yet, Irene.

Irene Himona, Analyst

My supplementary question, if I can go back to renewable natural gas, please. LCSS prices have more or less halved over the last year. I wonder if you can help us understand the impact, if any, on your own R&D. Does it create some pressures to perhaps work more on technology to try and reduce costs, given that the value of the incentive is half what it was last year?

Michael Wirth, CEO

Sure. Let me set the incentive aside for a second. In every one of our Downstream businesses, we're always working on reducing costs and improving technology and finding ways to become more efficient. This is inherent in our business. The dynamics around LCFS credits, RINs, AB32 credits in California, the EU trading scheme. We have to manage through their own cycles. It’s a part of our business that is related to but not necessarily correlated to the fundamental supply-demand dynamics that drive physical flows because you have government allocations of credits and whether people are building inventories of credits or drawing down inventories. They don't necessarily correlate with the underlying commodity. We have experience managing that. Certainly, the economics on something like RNG rely on the credit structure and regulatory framework that incentivizes those businesses. If you see the credits declining in value, that starts to erode a little bit of the margin in that business. We have to take a long-term view on these things. I think the regulators do the same. As they see credit values reflect a lot of length in credits, that suggests that the technology is advancing, the supply is advancing, and they can set more ambitious targets. These things evolve over time. Our people have a good track record of managing in that environment.

Operator, Operator

And our last question comes from Paul Cheng with Scotiabank.

Paul Cheng, Analyst

Mike and Pierre, one question for each. First is a simple one. In the past in your presentation, when you talk about Downstream, we talk about what's the chemical earning sequentially, whether they are up or down. You didn't mention it in your presentation this time. Does that mean that chemical earnings are actually relatively flat, which is surprising given how much is the margin drop we've seen in the industry? So that's the first question. Second question on Mike is for the LNG longer-term strategy. Most of your peers have been pretty aggressive in growing their LNG operation. You have very possible or at least very cash flow-rich LNG operations, but you don't really have much time to grow at least on the table. Can you maybe elaborate on what your longer-term strategy in LNG is?

Michael Wirth, CEO

Sure. Yes, quickly on chemicals, earnings were a little bit lower quarter-on-quarter. That’s really a function of margins. We had higher ethane prices and lower polyethylene prices. The olefins margins, which is the largest driver of our performance, were squeezed. So it did go down sequentially. On LNG strategy, we've long favored the Pacific Basin, given the best customers are in Japan, Korea, and Taiwan markets and our resource position in the Pacific. The Atlantic Basin, we've got exposure to it. But Europe traditionally has been a market where you were competing with Russian pipe gas and just less attractive. With the changes now that we see in markets, we're increasing exposure to Atlantic Basin LNG. We've done a couple of deals with Gulf Coast projects under development that will give us offtake that we can move into global markets. We're advancing projects in the Eastern Mediterranean and the assets that were acquired with the Noble acquisition; that could potentially allow an expansion of the Leviathan field to provide LNG supply to global markets. We've looked at other opportunities. So the big process has been underway in Qatar. We were deeply involved in evaluating that opportunity. Like everything we look at, LNG has to compete against other investment opportunities in our portfolio. We'll stay very disciplined on capital; we won't invest in everything we could. We're going to invest in the best things. I expect that will include some LNG projects over time.

Roderick Green, General Manager of Investor Relations

I 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. Sarah, back to you.

Operator, Operator

This concludes Chevron's Third Quarter 2022 Earnings Conference. You may now disconnect.