Earnings Call Transcript - CVX Q2 2021

Operator, Operator

Good morning. My name is Katie, and I will be your conference facilitator today. Welcome to Chevron's Second 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 given at that time. Please note that 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, Katie. Welcome to Chevron's Second Quarter Earnings Conference Call. I'm Roderick Green, GM of Investor Relations, and on the call with me today are Jay Johnson, EVP of Upstream, and Pierre Breber, CFO. We will refer to the slides and prepared remarks that are available on Chevron's website. Before we get started, please be reminded that this presentation contains estimates, projections, and other forward-looking statements. Please review the cautionary statement on Slide 2. Now, I will turn it over to Pierre.

Pierre Breber, CFO

Thanks, Roderick. We delivered strong financial results in the second quarter, with the highest reported earnings in over a year. Adjusted earnings were $3.3 billion, or $1.71 per share. The quarter's results included special items totaling $235 million, including a remediation charge in the Gulf of Mexico and pension settlement costs. A reconciliation of non-GAAP measures can be found in the appendix of this presentation. Adjusted return on capital was near 8% and we lowered our net debt ratio to 21%. Strong operating cash flow enabled us to meet Chevron's top financial priorities. Our dividend was up 4%. We continue to execute our efficient capital program and we paid down $2.5 billion of debt. Despite lower year-to-date prices and margins, first half 2021 quarterly average free cash flow is near 2018 levels, primarily due to lower capital and operating costs and contributions from legacy Noble assets. We're maintaining strong capital and cost discipline. CNE is down 32% from a year ago and we are lowering our full year organic CNE guidance to around $13 billion, primarily due to lower spending at TCO and greater capital efficiency across the portfolio. Operating costs are on track with our March 2021 Investor Day guidance of a 10% reduction from 2019. Adjusted second quarter earnings were up $6.2 billion versus the same quarter last year. Adjusted upstream earnings increased primarily on higher prices in liftings. Adjusted downstream earnings increased on higher chemicals results, as well as higher refining margins and volumes. All other was roughly unchanged between periods. Compared with the last quarter, adjusted second quarter earnings were up about $1.5 billion. Adjusted upstream earnings increased primarily on higher commodity prices and higher production in the U.S. Adjusted downstream earnings increased primarily from strong chemicals results, as well as increased refining margins and volumes. All other charges were roughly flat between quarters and are running ahead of ratable guidance primarily due to tax charges and valuation of stock-based compensation. The All Other segment results can vary between quarters, and our full-year guidance is unchanged. I will now pass it over to Jay.

Jay Johnson, EVP of Upstream

Thanks, Pierre. Second quarter oil equivalent production increased 5% compared to a year ago. The increase in production was driven by the Noble acquisition and lower curtailments, partially offset by normal field declines, price-related entitlement effects, and asset sales. Turning to the Permian, we continue to incorporate greater efficiency into our activities. Even with our reduced activity levels, production is expected to be comparable to last year. Consistent with the guidance we shared in March, we're adding rigs and completion crews in the second half of this year, delivering an expected production rate of over 600,000 barrels a day by year-end. For 2021, we expect free cash flow, excluding working capital, to exceed $3 billion assuming an average Brent price of $65 a barrel. We're committed to lowering the carbon intensity of our Permian operations. One recent example is our shift from diesel fuel to electricity and natural gas to power drilling rigs and completion spreads. This reduces emissions, lowers well costs, and takes trucks off the roads, which results in higher returns and lower carbon. At FGP-WPMP, overall progress is at 84%, with field construction 69% complete. We've recently reviewed our cost and schedule targets. At this point, the net schedule extension from the pandemic is expected to be roughly a quarter for WPMP and two quarters for FGP. Our cost target remains $45.2 billion, as cost reduction efforts and favorable exchange rates offset an estimated $1.9 billion of incremental costs associated with COVID. The COVID costs include mitigation efforts, demob and remobilization costs, as well as the expected schedule extension I just mentioned. Although the total project cost target is unchanged, we have increased the project contingency to $1.9 billion to recognize schedule uncertainty associated with the virus and its variants. The project is currently at peak workforce and our primary focus is to mitigate the impact of the virus with vaccinations, testing, and isolation protocols to enable our workforce to achieve its productivity. In the Deepwater Gulf of Mexico, the Ballymore project is being developed as a subsea tie-back to our existing Blind Faith facility. The project recently entered front-end engineering and design and remains on track for a final investment decision next year. Earlier this month, we sanctioned the Whale project, which has the potential for future expansion. Fabrication of the Anchor project remains on track with assembly of the production facility hall underway. In Australia, we have sanctioned the Jansz-IO Compression project, which will support the flow of natural gas to Barrow Island. Repairs to the Gorgon propane heat exchangers are complete, and we now have all five operated LNG trains online in Australia. In Colorado, our newest generation of production facilities have eliminated the tanks and flare system to deliver a carbon intensity of only 6 kilograms of CO2 per BOE. The new facilities also have a 60% smaller footprint, higher reliability, and 15% to 20% lower lifecycle costs than a traditional facility design, another great example of higher returns and lower carbon. Back to you, Pierre.

Pierre Breber, CFO

Thanks Jay. In May we closed the acquisition of Noble Midstream. With this transaction complete, we have fully integrated Noble and have achieved greater than $600 million dollars in synergies three months earlier than previously guided. We also started up a mixed feed cracker at GS Caltex and plan to be at 100% design capacity in the third quarter. The project was completed under budget and five months ahead of schedule. In the third quarter, we're resuming our share repurchase program at a targeted annual rate of $2 billion to $3 billion. This is the rate that we believe is sustainable through the cycle, while continuing to pay down debt. The restart of our program is consistent with our financial priorities and builds on our track record. We have a history of buying back shares consistently in meaningful quantities and at a price close to the daily ratable average over the entire 17-year period. We're continuing to grow lower-carbon businesses. This quarter, we started co-processing bio feedstock at our El Segundo refinery, growing renewable diesel production in a capital-efficient manner by leveraging existing infrastructure. We recently announced an MOU with Cummins to develop commercially viable businesses in hydrogen. Also, we've completed front-end engineering on a carbon capture project for emissions from the gas turbines in one of our California cogeneration facilities. This project leverages two innovative technologies; CO2 concentration and carbon capture, and has the potential to scale across our full fleet of turbines. Finally, yesterday we announced the creation of Chevron New Energies, a new organization reporting directly to the CEO. This is an important step to build fast-growing, profitable new energy businesses to further advance a lower carbon future. Now, looking ahead. In the third quarter, we expect major turnarounds to reduce upstream production by 150,000 barrels of oil equivalent per day, primarily at TCO, which also reduces our expected curtailments to about 5,000 barrels per day. We expect to make an incremental pension contribution in the third quarter of $500 million. This is a one-time payment in addition to our regular quarterly contributions. With higher operating cash flows, TCO expects to pay back part of its loans this year versus our prior guidance of increasing its debt. There's no change in TCO's expected dividend this year. We've adjusted the guidance on the affiliate income line to reflect higher expected TCO earnings. Also, we expect higher dividends from CPChem in line with our share of higher earnings. On September 14th, we'll be hosting our Energy Transition Spotlight to provide more details on how we plan to lower carbon intensity in our operations and grow lower-carbon businesses. We invite you all to join us for this video webcast. Our objective is unchanged: higher returns, lower-carbon. During this quarter, we continue to make progress toward this goal, delivering stronger financial results and achieving important lower-carbon milestones. And with oil prices well above our dividend breakeven, and an industry-leading balance sheet, we will resume share buybacks, sharing part of the cash upside with our investors. With that, I will turn it back to Roderick.

Roderick Green, General Manager of Investor Relations

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

Operator, Operator

Thank you. Our first question comes from Phil Gresh with J.P. Morgan.

Phil Gresh, Analyst

Hey, good morning, Pierre. I'm going to pick up where you left off there on capital allocation. You announced that $2 billion to $3 billion buyback, which adds about $5 a barrel to your breakeven, which I think is about $50 inclusive of the dividend. Obviously, you want to have this sustainable plan. You've always talked about that. Oil's at 75 now. Help us put this in context. We have $15, $20 a barrel, extra oil price at this point, and your leverage is at 21% net-debt-to-cap. Do you want to keep driving down debt from here, or how are you thinking about things?

Pierre Breber, CFO

Thank you, Phil. By resuming the program, we will have repurchased shares in 14 of the last 18 years, which amounts to more than three out of every four years. We are doing this at a level that enables us to continue reducing our debt. With oil prices above $70, our debt levels should fall below the 20% to 25% range I previously mentioned. This net debt ratio range over the cycle corresponds to prices between $40 and $60, as we discussed during our Investor Day, but with prices significantly higher, we should move below the lower end of that range. Regarding breakeven, this is our fourth priority from a financial perspective, and we believe it's sustainable; we plan to maintain it throughout the cycle, but I don't consider it a firm commitment like our dividend, so it's not factored into the breakeven calculation. Lastly, during our Investor Day, we demonstrated that with a flat Brent price of $60 over five years, we can generate over $25 billion in excess cash beyond our capital and dividend needs. Therefore, initiating this buyback program at $2 to $3 billion a year indicates that we have ample capacity to sustain that at reasonable prices.

Phil Gresh, Analyst

Okay, that makes sense. And then the second question, just on the Capex side of things. The billion dollar reduction, you said it was a combination of Tengiz timing and the efficiencies. Is there any further breakdown you could give of those two factors? I'm trying to think about how some of this might carry forward as we look at the longer-term $14 billion to $16 billion range you've talked about.

Pierre Breber, CFO

Yeah. Let me start, then I'll pass it over to Jay. We lowered our guidance for this year only to $13 billion. As you say, it's primarily due to lower spend at TCO, and part from work that's being deferred, and then greater capital efficiencies across the portfolio. I think you can view that as about 50-50, as half project that's being deferred and half, greater capital efficiency. There's no change in our long-term guidance or guidance through 2025 of $14 billion to $16 billion. But Jay, maybe you could talk about some of the ways we're being more capital efficient.

Jay Johnson, EVP of Upstream

It's really across the portfolio as Pierre mentioned. In particular, drilling and completion activities for the Gorgon Stage 2 Project in Australia have been very efficient and ahead of plan in terms of costs. The drilling and completion in the Permian and other U.S. shale plays have also been very efficient. Additionally, we're observing overall strong cost discipline, ensuring that every dollar is utilized effectively, which is consistent with our operations, not only in the COVID environment but also in maintaining a disciplined approach throughout the organization.

Pierre Breber, CFO

Thanks, Phil.

Phil Gresh, Analyst

Thank you.

Operator, Operator

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

Paul Sankey, Analyst

Hi, good morning, everyone. I wanted to follow up on your ongoing development at Tengiz and the history of megaprojects, which has often faced high costs and capital expenditure concerns. Do you believe Tengiz will be the last megaproject? Additionally, is our focus shifting towards the Permian, regarded as a fragmented yet significant development? Does this align with the capital expenditure guidance you just reiterated, suggesting that we might not see another megaproject from you or any major western oil companies? Thank you.

Jay Johnson, EVP of Upstream

Thanks, Paul. In the oil industry, you never say never. But look, we've talked before that as we move forward with the asset and the portfolio that we have, the preponderance of our capital, 60% and more, is going to be going into shorter-cycle higher-return projects, which are very quick to bring new production on. We have low pre-productive capital. They tend to be very efficient, and we can adjust based on market conditions and react quite rapidly. But that doesn't mean all of our investment will always be in just short cycle. The Deepwater continues to be an important part of our portfolio. It has a very low carbon footprint, and it tends to have high returns. And so we've seen projects like Anchor and Whale and Ballymore in the queue. And we'll continue to see those roll in, but we're going to do that in a very disciplined way. We talked at the Investor Day about how we are taking action to make these capital projects more efficient, more effective. Going to the minimum facility objectives, and really building only what's necessary to deliver the returns that we're looking for. And I think that whole approach, as well as it being a relatively small amount of our capital, is going to lead to much more efficient and higher-return outcomes.

Paul Sankey, Analyst

Thank you very much, Jay. And then the follow-up would be, Pierre, how did you come up with the $2 billion to $3 billion of buyback annually? Can you just talk about the parameters, maybe the oil price assumptions? Thank you.

Pierre Breber, CFO

Well, we're thinking of a range of oil prices. I’ve said in the past, Paul as you know, that we would start a program when we were confident we could sustain it over the cycle through multiple years based on our confidence in excess cash flow and the strength of the balance sheet. And so you certainly presume that both of those criteria have been met. In terms of the level, it is to continue to pay down debt while we are having these prices. It's nothing really more than that. Again, as I said earlier to Phil's question, with prices above $70, our net debt ratio should be below 20%. And so this is a range that allows us to continue to do that. It also gives us a range to deal with uncertainty. We feel good about the macro, but undoubtedly there are the variants out there that can impact demand and you have OPEC+ still having curtailed volumes. So that flexibility is inherent in the range. It also gives us the flexibility to buy more or less, depending on the strength of Chevron's stock price, which we've heard from shareholders who have said they want us to try to beat the daily average. I showed a chart that says, 'We don't buy high, we buy very close to the daily average.' But if we can do a bit better and use some discretion, we've heard from our shareholders that they'd prefer that, so that's the thinking that goes behind the level, the range, and the timing.

Paul Sankey, Analyst

Thank you, Pierre.

Operator, Operator

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

Doug Leggate, Analyst

Good morning, everyone. Jay, I'd like to ask you a question first. This is a small follow-up to Paul’s question. It appears that there is a lot happening in the Gulf of Mexico that isn't getting much attention. You mentioned Ballymore, Whale, and Anchor; you have a non-working interest in Leopard and Puma, along with a few other projects. This has historically been a significant area for your company, offering efficient capital tie-back opportunities. Could you provide us with a quick update on your activity level there and your longer-term plans? It seems there may be more going on than you have shared with the market so far.

Jay Johnson, EVP of Upstream

Well, the Gulf of Mexico has been an important part of our portfolio for a long time and it continues to be. We're one of the largest lease holders in the Gulf of Mexico. But importantly, what we've been doing is focusing our new lease acquisitions to primarily concentrate in those areas where we already have infrastructure. And as we've talked before, with our focus on returns, we're looking for those opportunities where we can do exploration and if we find something that's normal, it can be tied back into our existing infrastructure much like a Ballymore. If we find something that ends up really big and justifies the greenfield development, we can go the route of a Whale project where we continue to focus on the minimum functional objectives, building facilities that are replicative of nature, so that we are building on the learnings of the past. We've developed the Deepwater asset class, so we're taking learnings from the Gulf of Mexico, from West Africa, from Deepwater Australia, sharing those rapidly between these different asset groups to make sure that we're staying on the forefront of efficiency. We have an exploration program that's laid out. We keep that at a pretty low level these days so that it can be very efficient, very focused. We have a good resource base across the portfolio, but we're always looking for that next high-return, low carbon barrel. And the Gulf of Mexico represents a good area for that.

Doug Leggate, Analyst

Sorry, Jay. I don't mean to press you, but I mentioned a couple Leopard, Puma and I think you've got Silverback as well. Can you give us an update on those?

Jay Johnson, EVP of Upstream

We will release information on those in due course. But at this point in time, we're not sharing information.

Doug Leggate, Analyst

Okay, thanks. Pierre, my quick follow-up is, plenty of cash-flow coming in, extraordinary capital efficiency, as Paul pointed out, not a huge amount of big projects in front of you. Well, what are you thinking currently on M&A? Because clearly, you did a fantastic job incorporating Noble. What's your latest thinking in terms of what you may consider for cash usage going forward? And I'll leave it there. Thanks.

Pierre Breber, CFO

We're very satisfied with Noble. We have completed the integration and achieved more than double the expected synergies. We were the first to announce and close this deal, acquiring quality assets at a low premium, which was timed well from an exchange ratio standpoint. As always, we maintain high standards and do not feel pressured to pursue transactions. We have discussed our portfolio and our ability to sustain and grow it efficiently. I want to emphasize that we don't necessarily see cash as a requirement for mergers and acquisitions in our business. Given the volatility in oil prices, using stock for transactions, as we did with Noble, is a prudent strategy that protects against fluctuations in pricing between buyers and sellers. So, I wouldn't interpret any balance sheet activities as signals for or against M&A. We will be strategic with our capital, whether organic or inorganic, and will only proceed if it benefits our shareholders.

Doug Leggate, Analyst

I appreciate the answers. Thanks, guys.

Operator, Operator

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

Neil Mehta, Analyst

Hey, thank you. Jay, the first question is for you on Tengiz. Appreciate the update here. Can you just go through some of the modeling work that you've done to get to that $2 billion of contingency and give investors your latest read on confidence interval around the costs? It seemed like a good update relative to what was feared. And the summer is always so important in Kazakhstan. Just talk about the key things that you are going to be watching for over the next couple of months to ensure that you're on track.

Jay Johnson, EVP of Upstream

Thanks, Neil. I'll be happy to. At TCO, the team has just done an extraordinary job of responding to the impact of the virus. And as we said, we've been able to capture cost savings, which have largely offset, along with some of our foreign exchange gains, offset the incremental costs due to COVID. So at this point in time, we've reached our peak workforce on FGP, and so we are maintaining that workforce. It is something where we have to continue to stay focused on mitigations, particularly with the rise in the Delta variant and other variants that we are exposed to. The vaccination program continues to go well; we have 42,000 members of our workforce that have gotten their initial dose and about 30,000 that are fully vaccinated now, and we continue to try and work with the Kazak government to increase those numbers. Because we were so successful in completing the fabrication, and that fabrication was done with such high quality, and it's been proven to be now dimensionally accurate, we've had our modules showing up at site within 1 millimeter to 3 millimeters of accuracy on where pipes land and the connections between modules. It's really helped us move forward from that standpoint. All of the modules going through the shipping program to arrive at Tengiz. They've all been successfully moved to site, restacked, and set on their foundations. We have that entire program behind us now. All the heavy equipment for the project has been set on foundations throughout the project, so our Heavy Lift Program is complete and being demobilized. And now we're just focused on the interconnections and the hookup and preparing for the turnover to completions and startup. So normally at this point, we would be decreasing our contingency because we have eliminated so many of the traditional risks. But in this case, we've actually increased it to $1.9 billion and that's primarily due to our uncertainty around future impacts from COVID; this pandemic is far from over around the world and so while we're doing well and we've been very successful at mitigating any potential impact through this, as you said, critically important summer, we need to stay that way. We're monitoring our productivity. We're very focused on being capitally efficient here. Our focus is on delivering this project at $45.2 billion. We've allowed the schedule to slip a little bit because it's just too hard to try and catch up. We didn't feel that was a good use of resources, so our predominant focus is on the cost and we're managing the schedule within that cost parameter.

Neil Mehta, Analyst

Thanks, Jay. Following up here on the asset level, can you talk about how you see the cadence of activity in the Permian? You talked about exiting the year close to 600,000 barrels a day. Remind us where you are right now. And do you see the Permian still as a growth engine for you, or are you planning on running the business more for free cash flow and with less growth in mind as we think about 2022?

Jay Johnson, EVP of Upstream

In the Permian, we scaled back our activity significantly last year and have been maintaining a lower level of activity. However, even with this stable level, our efficiency improvements are allowing us to achieve more output. In July, we added an additional completion crew and are planning to add another one before the end of the year. We currently have five drilling rigs operating and expect to add at least one or two more in the late third and fourth quarters. We are beginning to see an increase in our activity levels in the second half of the year as the market moves closer to equilibrium. We will continue to monitor market signals, but we remain disciplined and focused on our primary objective of maximizing returns. We are returning to more efficient factory drilling rather than focusing primarily on lease retention as we did over the last 18 months. The Permian will continue to be a crucial asset in our portfolio. We have shown that we can generate free cash flow while still growing, thanks to our disciplined approach to balancing these goals moving forward.

Pierre Breber, CFO

And Neil, in our earnings supplement, we mentioned a memo item, the Permian unconventional total production, so there's 577,000 barrels of oil equivalent in the second quarter. Thanks, Neil.

Neil Mehta, Analyst

Thanks, Pierre.

Operator, Operator

We'll take our next question from Paul Cheng with Scotiabank.

Paul Cheng, Analyst

Hi, good morning, guys.

Pierre Breber, CFO

Good morning.

Jay Johnson, EVP of Upstream

Good morning.

Paul Cheng, Analyst

Two questions. In Permian, Jay, as you consider your plans for the upcoming year or the next few years, does the fundamental long supply in the market influence your decision-making process?

Jay Johnson, EVP of Upstream

Well, I think, of course, it does. And that's because we're not just being triggered by an instantaneous price or some price threshold to signal a need for more activity. As we've talked about, as we gave you guidance at the Investor Day, we've given you our forward-look of the Permian with the expectations of how markets recover. Now, we've seen demand recover in the marketplace quite rapidly. And in most of the products, other than maybe international jet fuel, we are seeing demand starting to return to pre-pandemic levels. But the supply picture is still a fundamentally oversupplied world and that's why we're being cautious, we're being balanced, and we're going to continue to monitor the market, as we continue to decide how to ramp up our activity levels in the Permian. The Permian has very low carbon intensity, so it's a good place for us to continue to develop new barrels. Not only for us, but for the world, but it also has high returns for us. So it remains a key target for increased capital allocation. But we're not going to be driven by an output target or a production target; we're driven by the opportunity to make returns.

Paul Cheng, Analyst

Maybe let me just ask it in another way, Jay. If you determine next year the market is still fundamentally oversupplied, will you still grow the Permian production?

Jay Johnson, EVP of Upstream

We've given you the guidance, we're going to continue to be disciplined as we have in the past and I'd rather not speculate beyond that, Paul. I've given you about as much of our thinking as I can.

Paul Cheng, Analyst

Okay. The second question, actually this is for Pierre. In the next several years, when you're looking at $14 to $16 billion a year in Capex, do you have a target percentage on how much you're going to spend on new ESG initiatives in the business?

Pierre Breber, CFO

Well, yeah. We talked at our Investor Day about $3 billion in total to lower the carbon intensity of our operations and grow low-carbon businesses. That was through 2028, and in terms of updates to that, I'll wait and put another advertisement for our Energy Transition Spotlight. So that will be September 14th, that will be webcast to everybody. We will go deeper into our actions to advance a lower-carbon future and we will have more to say then.

Paul Cheng, Analyst

Alright, thank you.

Pierre Breber, CFO

Thanks, Paul.

Operator, Operator

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

Manav Gupta, Analyst

Hey, guys. You and your partner recently sanctioned the Whale project. Can you help us with some more details, CapEx, volumes, anything which will help us model the project a little better so you get credit for it in the estimates?

Jay Johnson, EVP of Upstream

Thanks for the question. What I would say is we are not the operator. And so for those types of questions, we'd like to refer you to the operator as the best source of information for those types of things. I will say Whale is a really good asset. We're happy to invest in this project. We expect low carbon intensity from the action from this asset. We're looking for good returns. It's also based on many of the principles that we have been talking about for better capital efficiency. It's based on a minimum facility objective, where this facility is largely a replica of a previous Gulf of Mexico development. There was great cooperation between Chevron and the operator to develop just what was the right balance between using exactly what was done before and what enhancements or innovative needs to be incorporated into the facility. So we're quite happy with this project and look forward to seeing it progress. But I'll refer you to the operator for the details.

Manav Gupta, Analyst

My quick follow-up here is, CPChem was very strong in the quarter. My question is, at one point, you and Qatar Petroleum were actually looking to build two JV crackers and then obviously the pandemic happened. And so how should we think about those crackers? Is there a possibility they can be brought back on the table given the tightness you're seeing in ethylene chain margins or should we think about them as projects which might not be pursued ever?

Pierre Breber, CFO

We are making progress on our projects in partnership with Chevron Phillips Chemical Company and Qatar. Currently, the Gulf Coast project is slightly ahead, as we completed the SID late last year, and we are collaborating on determining the next steps, including when we will make a final investment decision. We continue to advance both this project and Ross to fund, and both are competitive due to their low-cost ethane feedstock. This gives them a relative advantage compared to other projects worldwide. Meanwhile, in Aveeno, we are experiencing tight conditions due to strong demand and limited inventories, partly due to the impacts of Winter Storm Uri. However, we anticipate medium-term capacity additions. Mark Nelson, our Head of Downstream, and his team are concentrating on ensuring that our projects are not only capital efficient but also cost-effective. It’s essential for us to have an advantage in ethane feedstock, but we also prioritize capital and cost-efficient development, which is the focus of our teams.

Manav Gupta, Analyst

Thank you.

Pierre Breber, CFO

Thanks, Manav.

Operator, Operator

We'll take our next question from Biraj Borkhataria with Royal Bank of Canada.

Biraj Borkhataria, Analyst

Hi, thanks for taking my question. First one's on Abgami. One of your peers highlighted a redetermination of the Abgami field in Nigeria, and you're a majority owner. There's actually limited details on this upside of the headlines, but would you be able to confirm whether this impacted you, or you had any change in ownership in that field, and whether there's any cash impact in the second quarter? And then I have a follow-up on a different topic.

Pierre Breber, CFO

Yeah, we won't comment specifically on that area. It's commercially sensitive, we've had a longstanding practice of not discussing commercially sensitive matters.

Biraj Borkhataria, Analyst

Okay, fine. Second question is actually just a more general question on inflation. Would you be able to talk about what you're seeing across services and raw materials and whatnot regarding any worrying signs of inflation across the portfolio?

Pierre Breber, CFO

We are not. We've talked in the past about isolated areas. I mean, for example, steel costs that go into our tubulars and our wells are up, but it's a fairly small component of a well cost, maybe about 10%. We certainly are seeing tightness in trucking services that have impacted us at times and some wage labor cost increases there, but I think there is more talk about it than we're seeing in terms of action. I'd say our COGS is pretty well under control in the upstream and downstream segments.

Biraj Borkhataria, Analyst

Okay. Thank you.

Pierre Breber, CFO

Thanks. Thanks, Biraj.

Operator, Operator

We'll take our next question from Stephen Richardson with Evercore ISI.

Stephen Richardson, Analyst

Hi, good morning. Pierre, could you provide some insights on the new energy business? As you progress with this business plan, it seems there's a recurring theme regarding policy frameworks in various regions and whether they support the establishment of a business. I'm interested in your thoughts on identifying high-return opportunities that align with the current market and policy climate, as opposed to those that may require a longer wait. I want to ensure we don’t commit capital to projects with uncertainties.

Pierre Breber, CFO

Well, we operate in California which has a lot of policy support in this area, and we're the leading downstream player here with a leading brand and have a large upstream business. But you're right, policy does vary, but there's enough policy to advance these businesses. Now, there are two main parts to our lower-carbon activities. The first is to lower the carbon intensity of our operations, and that largely does not depend on policy or at least certainly the first steps. We put out a 2028 target that has a 35% reduction to 24 kilograms per barrel, and that's something we're taking action on. And then we're also advancing lower-carbon businesses. The announcement yesterday was really focused on hydrogen carbon capture. Our downstream team is advancing renewable fuels; we've talked about renewable natural gas and renewable diesel previously. What we're trying to do around lower-carbon really is connected to our assets, capabilities, and customers. So one thing we're not doing in lower-carbon is large scale wind and solar. We're certainly having renewable power supply or operations again, part of lowering the carbon intensity, but not pursuing it as a standalone business. That's a decision that we're making because we don't feel like we have a competitive advantage. But when we get to renewable fuels, like renewable natural gas, renewable diesel, sustainable jet, hydrogen, carbon capture, these are areas that are adjacent to our business where, again, we have capability, we have customers, and we have assets that we can leverage. We sell to United Airlines. United Airlines is going to buy a sustainable jet. Sustainable jet is going to be a percentage of jet for some time period, 2%, 5%, 10% mix with conventional. We're the natural player in that space, so again, we'll share more on September 14th, but that's a little taste of what you should expect from us.

Stephen Richardson, Analyst

Great, thanks very much. I appreciate the clarity.

Pierre Breber, CFO

Thanks, Steve.

Operator, Operator

We'll take our next question from Jon Rigby with UBS.

Jon Rigby, Analyst

Thank you very much. I think the question for Jay is you've mentioned carbon intensity in relation to projects a couple of times, and the operator on Whale pointed it out in the FID statement. Could you elaborate on that? I was particularly struck by your comments in the prepared remarks regarding the very low carbon emissions in Colorado by BOE. Can you discuss how you incorporate carbon emission profiles into your FID process alongside traditional metrics like NPVs, IRRs, and payback periods? Additionally, considering your portfolio, which has been developed over many years, is there potential for work that focuses on reducing carbon emissions and, as Pierre mentioned, whether incorporating renewables as a power source can also yield an economic return?

Jay Johnson, EVP of Upstream

Thanks for the question. A pretty broad question, so I'm going to start broad, but then I'll focus in on the Gulf of Mexico. In the upstream portfolio as we take stock of where we are as Chevron, our entire upstream portfolio, as best we can determine, sits at roughly half of the industry average for carbon intensity worldwide, so we're starting from a good position. We've been very focused on starting to bring our carbon down for some time now, and so we set our initial goal back in 2016 for carbon intensity reduction for the upstream. Since 2016, we've actually reduced our flaring by 60% and our methane emissions by 50%, and we've done that largely through what we call the marginal abatement cost curves. And just as we do in exploration, we don't have every business unit out there making their own independent decisions, but rather they bring their ideas for carbon reduction investments to the center, and then we look across the entire enterprise, not just upstream, but upstream and downstream, midstream, and we invest into those opportunities that give us the greatest carbon reduction for the least amount of capital. And that's in keeping with our focus on being a higher return company. What we've been able to find so far is that the projects have been relatively low-hanging fruit. And so we've seen these big reductions in carbon that have occurred since 2016, and in fact, we reached our 2023 targets in 2020, three years ahead of schedule. And so we've already set new targets which we talked to you about at the Investor Day in March, for 2028. And that's the path that we're working towards now, and that's to get down to an average of 24 kilograms of CO2 per barrel, equivalent across the entire portfolio. Places like the DJ basin, where some of the Noble teams have done a great job of designing out the parts of the process that have the highest emissions have resulted in those huge gains. And so, as we said, not only are we seeing a 15 to 20% lower lifecycle cost, we're seeing high reliability, 60% footprint reduction, and they're down in the 6-kilogram CO2 per barrel equivalent range, which is tremendous. To put that into comparison, the entire Gulf of Mexico, our operations last year in 2020, were at 7 kilograms of CO2. And that's why we think it's so important there's good information for policymakers to understand that places like the Gulf of Mexico allow us to produce a very critical supply of energy to the U.S. and to the world, but also do that in a very carbon-efficient manner. In terms of our decision-making, these are all elements that we have to balance as we make investment decisions. But we are bringing these factors and these criteria into the equation as we evaluate where we are going to allocate capital and how we're going to move forward.

Jon Rigby, Analyst

That's great. Thank you.

Pierre Breber, CFO

Thanks, Jon.

Operator, Operator

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

Jason Gabelman, Analyst

Yes. Thanks for taking my questions. First on the buyback, if I recall correctly, last year there was concern around what OPEC+ would do, and that factored into both your shareholder distribution strategy as well as your Permian production strategy. Are you kind of confident now that OPEC+ is going to continue to manage the market and did that factor in to your strategy or your decision to resume buybacks or were those kind of looked at independently? And then secondly, just a clarification on TCO FGP. Can you remind us what the free cash flow flip is from, I guess 2022, which is the last full year of project spend, to 2024 when the project is fully up and running? Thanks.

Pierre Breber, CFO

Thanks, Jason. I'll start with the second question. We haven't provided specific free cash flow guidance at the asset level for TCO. You are correct that we will see increased dividends from Tengiz, related to our ownership in TCO, as capital expenditures decrease and the project commences. This is a significant component of the Company's guidance of a 10% annual free cash flow projected through 2025, with much of that coming from the Permian and Tengiz. Additionally, we'll be repaying loans, which will appear in a different section of the cash flow statement, but it still represents cash. While we haven't shared any asset-specific information, it's included in our overall free cash flow guidance, which I reference during our Investor Day. As we approach the startup phase, we might be able to provide more specific details. Regarding share buybacks, we evaluate certain criteria to ensure we can sustain them confidently throughout the economic cycle. There are uncertainties, including the Delta variant and OPEC+. The actions OPEC+ decides to take are beyond our knowledge and represent a risk. However, we have strong confidence in the investments and assets Jay has discussed, as well as the robust performance in our downstream and chemicals sectors. Considering the economic recovery and the discipline shown by companies in the U.S. and around the globe, we are optimistic about maintaining this program for several years while also reducing debt.

Jason Gabelman, Analyst

Thanks.

Pierre Breber, CFO

Thanks Jason.

Operator, Operator

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

Ryan Todd, Analyst

Thanks. I wanted to follow up on the balance sheet discussion we had earlier. Pierre, you mentioned that given the current oil prices, you're probably going to be below the 20-25% net debt target. Is there a specific level of debt where you would start to feel under-levered, whether that's from an absolute debt standpoint, a debt-to-cap perspective, or even in terms of efficiently managing debt repayment? At what point would that influence the allocation of excess cash toward buybacks or increasing dividends?

Pierre Breber, CFO

There is currently no specific internal number to cite, but we have flexibility in our capital program and cash flow generation. The 20% to 25% range I mentioned may even be higher than what we would have seen five years ago due to our past long-term capital projects and lower debt levels. As we approach the completion of Tengiz in the next couple of years, most of our capital program has become much more flexible, allowing for this higher range. I would prefer to keep our debt comfortably below this level. In response to whether we would consider increasing share buybacks, that is indeed possible if our debt ratio falls comfortably below 20%. Looking ahead at our cash flows, we could expand that range further. Historically, we've adjusted our share buybacks; we've started at a certain rate, increased it at times, and decreased it at others, and we plan to continue this approach.

Ryan Todd, Analyst

Great, thanks. And maybe a separate follow-up on Energy Transition activities. You've continued to be fairly active in renewable natural gas. You've done a modest amount. I know you mentioned some co-processing and renewable diesel, or maybe we just don't have a lot of detail on it yet, but how are you thinking about the opportunity set as you look down the lines for renewable diesel and sustainable aviation fuel? Would you consider doing something more meaningful, including the potential conversion of an asset or likely focus on smaller steps like coprocessing?

Pierre Breber, CFO

We will provide more information at the Spotlight presentation. The co-processing we recently started is a 2-stage process, which will enable us to reach a capacity of up to 10,000 barrels a day by the end of the year. We have completed the first phase and are moving into the second phase, which will make us the first U.S. refinery to co-process through an FCC in that phase, giving us the ability to produce 10,000 barrels a day. We chose this approach because it is highly capital efficient; we are utilizing existing equipment, which mainly consists of a tank and some pipes. This method allows us to be very cost-effective. There is clear growth in demand for renewable diesel, and we are also seeing an increase in supply. Renewable markets operate similarly to conventional commodity markets. Therefore, we will maintain a disciplined approach. This project is highly competitive, and we will share more details during the Spotlight on September 14th.

Ryan Todd, Analyst

Okay. Thanks, Pierre.

Pierre Breber, CFO

Thanks, Ryan.

Operator, Operator

We'll take our last question from Sam Margolin with Wolfe Research.

Sam Margolin, Analyst

Thanks. How are you? Just one for me on LNG as an asset class in the context of low carbon. I'm pretty sure it would be below your target on a per unit basis, but gas prices are very high globally, LNG prices are very high. There's some opportunities out there in LNG, and I'm just wondering on Chevron's official position on how that marries with your broader emissions targets.

Jay Johnson, EVP of Upstream

We view our LNG assets and production as part of the upstream segment of our portfolio, which is reflected in all the numbers we've shared. We are actively seeking ways to enhance the efficiency of these operations and reduce their carbon intensity. We believe natural gas is a significant fuel, particularly as a transition fuel, playing a vital role in reducing the global carbon footprint. Therefore, we will focus on gradually increasing capacity at our existing facilities and exploring opportunities to utilize current or upcoming oil production in other facilities to boost production. Most importantly, we intend to maximize the returns on our existing investments as we move forward. While LNG is part of our portfolio, it does not hold a special or premium status.

Sam Margolin, Analyst

Okay. Thank you.

Pierre Breber, CFO

Thanks Sam.

Operator, Operator

Our last question comes from Neal Dingmann with Truist Securities.

Neal Dingmann, Analyst

Good morning everyone. I have a question regarding protection. In the past, you have utilized interest rate swaps and other instruments. I'm curious about the current discussions surrounding hedges and your approach to them. Clearly, you maintain a solid balance sheet that reassures stakeholders. However, I would like to hear about your policies and strategies concerning various protection mechanisms, such as interest rate swaps and hedges. Thank you.

Pierre Breber, CFO

Well, on the commodity price side, we don't have, except for transportation, but we don't have flat price commodity hedges. And in terms of our debt, I mean, we tend to have a fair amount of variable debt or short-term debt, a commercial paper and others, but undoubtedly we also have some term debt that's fixed. I think our average interest cost is around 2%, our mix is probably less than half variable. But as you say, we have very strong credit, very strong balance sheet, and so we don't pay for a lot for insurance and we don't think our shareholders want that. I think our shareholders want certain exposure to commodity prices so they enjoy the upside and then they want us to maintain a strong balance sheet. Thanks, Neil.

Neal Dingmann, Analyst

No, absolutely. Thank you.

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. Katie, back to you.

Operator, Operator

Thank you. This concludes Chevron's Second Quarter 2021 Earnings Conference Call. You may now disconnect.