Earnings Call Transcript
CHEVRON CORP (CVX)
Earnings Call Transcript - CVX Q1 2023
Operator, Operator
Good morning. My name is Katie, and I will be your conference facilitator today. Welcome to Chevron's First Quarter 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers' remarks, there will be a question-and-answer session and instructions will be given at that time. As a reminder, this conference call is being recorded. I will now turn the conference call over to the General Manager of Investor Relations of Chevron Corporation, Mr. Jake Spiering, please go ahead.
Jake Spiering, General Manager of Investor Relations
Thank you, Katie. Welcome to Chevron's first quarter 2023 earnings conference call and webcast. I’m Jake Spiering, General Manager 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. Now, I will turn it over to Mike.
Mike Wirth, CEO
Chevron delivered strong financial results again last quarter, the seventh consecutive quarter with a return on capital employed greater than 12%. This enabled another record for cash returned to shareholders while maintaining a very strong balance sheet. Since our investor day two months ago, we’ve remained focused on executing our plans. Achieving important milestones on our major project in Kazakhstan, continuing to build activity levels in the Permian, positioning Bayou Bend to be one of the largest carbon storage projects in the United States, and safely and reliably delivering oil, products, and natural gas that help power the global economy. Next week, we’ll publish our Corporate Sustainability Report. I encourage you to review it on our website as we provide updates on the ESG topics that matter to our business and our stakeholders. In closing, while commodity markets remain uncertain, our approach is unchanged: capital and cost discipline applied to advantaged assets in both traditional and new energy businesses and steady returns of cash to shareholders. You can see that consistency in our actions and our results. Now to Pierre to discuss the quarter.
Pierre Breber, CFO
Thanks, Mike. We reported first quarter earnings of $6.6 billion, or $3.46 per share. Adjusted earnings were $6.7 billion, or $3.55 per share. We had one special item this quarter related to changes in the energy profits tax in the United Kingdom. The appendix of this presentation contains a reconciliation of non-GAAP measures. Strong operating cash flow enabled Chevron to deliver on its financial priorities during the quarter: a 6% per share dividend increase, higher CapEx within budget, net debt ratio under 5%, share repurchases at the top of our prior guidance range. Adjusted first quarter earnings were up over $200 million versus last year despite 20% lower oil prices. Adjusted Upstream earnings were lower mainly due to realizations, and adjusted downstream earnings increased primarily due to higher refining margins. Both segments benefitted from a change in timing effects. Higher interest income and lower accruals for stock-based compensation decreased all other charges. Compared with last quarter, adjusted earnings were down $1.1 billion. Adjusted Upstream earnings decreased primarily due to lower realizations. Other items include the absence of last quarter’s dividend withholding tax at TCO and lower exploration and transportation expenses. Adjusted Downstream earnings were essentially flat. Lower margins and volumes were offset with higher chemical earnings and other favorable items including trading results. Lower accruals for incentive-based compensation decreased All Other net charges and also benefitted the operating segments. First quarter oil equivalent production was down about 80,000 barrels per day from last year due to the expiration of a contract in Thailand and the sale of our Eagle Ford asset. This was partially offset by growth in the Permian. We expect 2023 production growth in the Permian to be back-end loaded as wells put on production (POPs) increase across both operated and non-operated areas. We expect our royalty production to be roughly flat. As discussed during our Investor Day, we’re increasing activity in New Mexico. All four company-operated rigs added this year, one each quarter, will be in New Mexico, leading to more POPs expected in the second half of the year and into 2024. We also continue to be active in Texas. Last year, about half of our company-operated production was in the Delaware Basin in Texas with the remainder split about evenly between the Midland Basin and New Mexico. More than half of our non-operated production is with five major operators in large, contiguous positions in core areas with multi-year development programs, where we have visibility to capex and execution schedules and a royalty benefit compared to the operator. The balance is with dozens of other operators where we have a little less visibility, but similar predictability from greater diversification. More than half of our royalty production comes from the Pecos River area in the heart of the Delaware Basin. The balance of our royalty position is in the remainder of the Delaware and Midland Basins, also with well-known operators. In summary, Chevron has a large, diverse position in the Permian with a unique royalty advantage where we learn from our own operations and from others. Now, looking ahead. In the second quarter, we expect planned turnarounds at Gorgon and in the Gulf of Mexico along with downtime at an FSO in Thailand and a number of planned refinery turnarounds. Also, we expect share buybacks to increase to a $17.5 billion annual rate. In summary, 1Q was another quarter with strong financial results, continued capital discipline, and a steady return of cash to shareholders. We’re confident that consistent and straightforward management, through commodity cycles, will create value for stakeholders. Back to you, Jake.
Jake Spiering, General Manager of Investor Relations
That concludes our prepared remarks. We are now ready to take your questions. Please limit yourself to one question and one follow-up. We will do our best to get all your questions answered. Katie, please open the lines.
Operator, Operator
Thank you. Our first question comes from Devin McDermott with Morgan Stanley.
Devin McDermott, Analyst
Hey, good morning. Thanks for taking my question.
Jake Spiering, General Manager of Investor Relations
Good morning, Devin.
Devin McDermott, Analyst
Good morning. So there were some helpful detail in the slides and the remarks on the breakdown of Permian operations. If I look at the quarter, your volumes did fall a bit sequentially in 1Q versus 4Q. I wonder if you could just talk in a bit more detail about some of the drivers there, how things are going as you ramp New Mexico activity. And that's typically the confidence that you have in that back-half weighted production ramp.
Mike Wirth, CEO
Thank you, Devin. Pierre provided more details, including insights on COOP JV, royalty, drilling activity, and feed drilled, which I’m glad were helpful. The performance in the first quarter was mainly due to a slight decrease in NOJV and royalty production, which is a significant part of our overall output, compared to the fourth quarter of last year. This can fluctuate based on partner reporting. However, over time, the NOJV segment has shown an upward trend, even though it was down in the first quarter relative to the fourth quarter last year. COOP production remained largely unchanged from the fourth quarter of last year to the first quarter of this year. Looking ahead, our full-year outlook, as shown on Slide 9, is approximately 770,000 barrels per day, up from just over 700, with 2022 being around 707. We expect COOP production to grow in the mid-single digits, NOJV in the mid-teens, and royalty to remain roughly flat year-on-year. This outlines our first quarter, and we believe the guidance will remain appropriate, as Pierre mentioned, with a back-end loaded approach. We will provide updates each quarter.
Devin McDermott, Analyst
Got it makes sense. Thanks. And my follow up is on TCO. And it's exciting that we're now less than a year away from startup there and back at the Investor Day, you noticed that you had shifted to commissioning and the startup work for WPMP. I was wondering if you could just give us an update on how things are going there, the latest expectations on timing. And then also the key milestones that we should be keeping an eye out for the balance of this year ahead of startup.
Mike Wirth, CEO
Yeah, absolutely. I actually was in Kazakhstan earlier this month. I had a chance to meet with the President of the Republic, some other senior officials, and also spent time down at Tengiz and visited the job site, talked to both people from our construction team, people from the commissioning team, and people from operations as we're preparing for startup. And I'll tell you, it looks a little less like a construction site, a little bit more like a plant than it did the last time I was down there. So the progress is very obvious. The headline I'll give you is there's no change to our cost or schedule guidance. We expect WPMP startup to begin by the end of this year. Now that's a conversion of the field from high pressure to low pressure, so that will take some time as we take all the metering stations and field infrastructure down to low pressure, but that will still begin by the end of this year. The startup of the future growth projects, the portion that adds 260,000 barrels of oil production, will begin by mid next year. Both of these require a series of turnarounds and tie-ins and things like that. So it's quite a complex set of activities to get us to the point where we've got everything online. But there's a lot of work behind us. While I was there, we achieved mechanical completion on the third-generation sour gas injection facility, which was ahead of schedule. And there were a number of milestones that I mentioned that we talked about at the Investor Day that we've achieved. So we completed the tie-in of the fuel gas system, so the first gas turbine generator we fired that generator so we know that it's working. In the second quarter in terms of milestones to watch for, we're working to commission boilers, steam systems, and other utilities that are required for the startup of the pressure boost facility, which is the key driver of that conversion from high pressure to low pressure field operations to enable sustained well deliverability. In the third quarter, we expect mechanical completion of the future growth project. And then, as I said, we will begin startup activities on the field conversion to low pressure by the end of this year. So those are some of the key milestones. And, like I say, a lot behind us, but there's still a lot of complex work ahead. We'll be updating you on it every quarter.
Devin McDermott, Analyst
Good to hear. Thanks, Mike.
Mike Wirth, CEO
All right, Devin. Thank you.
Operator, Operator
We'll take our next question from Neil Mehta with Goldman Sachs.
Neil Mehta, Analyst
Yeah, thank you so much, Mike and Pierre. The first question is just around the LNG portfolio, a lot of volatility in the global gas markets over the course of the last year. Just be curious how you guys are seeing the outlook and any updates on your portfolio, particularly down in Australia, where recognized you're going to take into maintenance, but seems like it's operating pretty well.
Mike Wirth, CEO
Overall, the gas markets have experienced quite a journey over the past year, with extremely strong prices now compared to exceptionally weak prices two years ago. Currently, prices have moderated due to warmer weather in the northern hemisphere and a more stable situation in Europe. Inventories in both Europe and the U.S. are healthier than previously feared. While the market remains strong by historical standards, it’s not as robust as before. Operations at Gorgon and Wheatstone are performing exceptionally well, with a record number of LNG cargoes exported from Australia last year, surpassing our previous best by 10%. The reliability of the two facilities is in the first quartile. This year, we will initiate the second turnaround cycle, a four-year schedule for maintenance. Gorgon Train 1 is slated for a major planned turnaround in the second quarter. We are also progressing on the next stage of field development to maintain the field with drilling and startup activities for the upcoming gas developments. Operations in Australia are strong both in terms of reliability and operational performance. Additionally, we are exploring opportunities in our LNG portfolio beyond Australia. While we’ve discussed the Eastern ramp at length, we expect to finalize a concept for the Leviathan expansion by the end of this year. In Equatorial Guinea, we’re assessing ways to incorporate additional gas resources using existing infrastructure. Our focus remains on enhancing the value of our LNG business while ensuring that any actions taken are beneficial for returns.
Neil Mehta, Analyst
That's great. And then the follow up is just on return of capital. And I think you guys have been pretty clear about the range that we should be thinking about from a buyback perspective. Just on dividend growth, just talk about how do you expect that to track relative to your free cash flow per share expectations?
Mike Wirth, CEO
I believe we have been transparent about buybacks, so I won't elaborate on that. Regarding dividends, our history should demonstrate our commitment. These are decisions made by the board each year, but we have now achieved 36 consecutive years of increased payouts over the past five years. Our dividend growth per share has outpaced that of our closest competitors. This achievement has been sustained not only in the long term but also through the recent period of volatility. I am confident in our dividend track record. I would like to emphasize our four financial priorities, the first being to maintain and grow the dividend. Earlier this year, we implemented a 6% increase, contributing to an annual growth rate of 6% over the last 15 years. Once again, our track record on dividends is noteworthy. The recent quarter we just closed saw the highest cash distributions to shareholders for the fourth consecutive quarter, and we are committed to consistently delivering cash back to shareholders through both buybacks and dividends.
Neil Mehta, Analyst
Yep. Thanks, Mike.
Mike Wirth, CEO
Okay, Neil, thank you.
Operator, Operator
We'll go next to Roger Read with Wells Fargo.
Roger Read, Analyst
Yeah, thank you. Good morning. Maybe come back to the Permian a little bit. I know you've been providing us a lot more detail on things. And I appreciate that detail for the overall production breakdown in the U.S. But looking at the Permian, the Chevron operated portion versus your JV non-op, is we think about some of the snags that have been hit over the last couple of quarters, where have been the biggest problems? Is it been in the operated or the non-operated? And then as you think about correcting those over the next couple of quarters, how much of that is Chevron-controlled versus partner?
Mike Wirth, CEO
Yeah. So I will speak to our operated operation, because I really can't speak on behalf of the others. They should speak on behalf of their operations. We certainly learned from those. But, we spent a pretty good amount of time at the Investor Day, talking about the learnings on drill one uncompleted wells that had sat for a long time talking about the prior basis of design for the wells, including spacing and profit loading, talking about multi-venture development. And we've learned a lot from our own operations, and those learnings are augmented by the things that we learned from others. And so we talked about more single bench development, more activity. In New Mexico, we continue to be very focused on driving strong returns and not optimizing to production or some other metric. Just to give you a little bit more guidance, Roger for this year, in terms of how to think about it. We expect royalty production to be roughly flat, in the neighborhood of a little bit over 100,000, maybe 110,000 barrels per day. Most of that comes from the Pecos River area where we've got big operators, Oxy's largest operator in that area, but others that are well-known operators in that area. And then we've got some that comes in from the Midland as well from big operators where there's a lot of visibility into what their plans are. Our COOP production growth, we expect to be mid-single digits for the full year. Maybe a touch higher than the midpoint of single digits and expect roughly 190 wells to be put on production this year, which is down a little bit from last year, maybe 10% from last year when our COOP production increased 35,000 barrels per day. We've got growth in the Texas side of the Delaware earlier in the year, the New Mexico side, later in the year, which follows the chart Pierre showed you with drilling lateral feet. And then in the NOJV, the growth is higher. It's in the mid-teens for the full year. The gross number of POPs in our NOJVs are expected to be up about 15% year-on-year. And it's interesting, our net POPs actually increased more than the gross because we have a relatively high working interest and a significant royalty advantage in the non-ops. And so a 15% increase in gross POPs actually translates into more production than you might presume. We've got really good visibility into the execution schedule we've received more than three quarters of the AFEs for this year's activity. And operations have actually begun on more than three quarters of the NOJV wells that we expect to be popped this year. So it's a mix. We've got a really strong, but also a bit of a complex portfolio because of these three different contributors and we're continuing to hold the guidance, as I said earlier, at about 770 for full year.
Roger Read, Analyst
No, that's great. I appreciate that. And a follow-up question, I suspect, is for you, Pierre. Working capital, obviously tends to be a draw in Q1. You've got the sounds like a decent level of planned maintenance in Q2. So just any thoughts on how we should look at overall cash flow generation Q2, maybe rest of the year in terms of the cadence?
Pierre Breber, CFO
In the first quarter, there was an increase in working capital which drew down cash, mainly due to inventory. Last year, we experienced a similar situation where cash was drawn primarily through taxes payable, and you'll notice some of those payments occurring in the second quarter. We aim to provide figures that exclude working capital since it tends to balance out over time, although there can be some fluctuations. Regarding free cash flow, it is influenced by commodity prices and margins, which we detailed during our Investor Day along with potential scenarios for upside and downside. As for working capital, you can expect timing effects, but we try to account for them. Next quarter, anticipate significant tax payments that will impact cash.
Roger Read, Analyst
Okay, great. Thank you.
Operator, Operator
We'll take our next question from Paul Cheng with Scotiabank.
Paul Cheng, Analyst
Hey, good morning, guys. Have been the kind of project due to the characteristics that we have different returns and different payback period criteria that I think management put. So for your low-carbon investment, not those that for the own emission mitigation activity, but that in terms of like CCUS as a new business. For that kind of business, what is the minimum internal rate of return and payback period that you sign in order for you to sanction the projects?
Mike Wirth, CEO
Yeah, Paul. Look, the reality is these are brand-new businesses. And we've got a lot of confidence in the returns and payback periods that we expect out of businesses we've been in for many decades and understand very well in well-established markets. These are businesses that don't exist today. They are in part enabled by a government policy, the rules of which are not yet fully written and the durability of which we need to ask ourselves questions about as we commit capital to it. So they're different. They're very different. Our goal over the long term is to get similar returns out of these businesses as we get out of our core business. And so that would be double-digit returns. In the mid-term to the near term, we're going to have to go into some of these things that offer high growth and opportunity with our eyes wide open, but also understand that as we establish them in the early days, we may not see the returns that we expect in the fullness of time. So we make big investments. Our expectation is over the life cycle of these investments, we're going to deliver those kinds of returns. But we're also mindful of the fact we've got to develop technology. We've got to scale these things. We've got to help markets mature. We've got to build operational experience. We've got to build risk management experience, supply chain, and customer capabilities in these businesses. And so in the near term, we'll be understanding of the fact that the returns in the short term will probably look different than our long-term expectations, but we won't go into things that we don't believe offer the long-term prospect for returns, which is why we have steadily avoided more well-established sectors like wind and solar, where we could go into those today because the risks are better defined, but we also understand the returns. And so we were just trying to do these kinds of projects, we would go into those, but they don't offer the kinds of returns we expect out of the things that we're working on.
Paul Cheng, Analyst
The second question is about your largest U.S. competitor, which has announced plans to expand more aggressively into trading and establish a unified trading organization. It appears there are significant opportunities in the market that they may capture, potentially following a playbook from Chevron. Historically, Chevron has been more conservative in this area. Do you believe there’s an opportunity for a company like Chevron, which has substantial global reach and a physical presence, along with a knowledge advantage over others? Is there a possibility that we are overlooking something for Chevron?
Mike Wirth, CEO
Well, Paul, what I would say is I think maybe your perception is a little bit miscalibrated from what I would describe. We have always had a global trading organization for many, many years; I used to run it. Pierre used to run it. And so we're in active trader. We trade in a certain way. And I'll give you the three-word kind of overarching description: we flow, optimize, and trade. So the first role of our commercial organization is to ensure our barrels and molecules flow to the market. The second is to optimize assets, ships, market positions, market knowledge, and be sure we get the most value out of our system that we possibly can. And then the third responsibility is to trade. And we do third-party trading. We do what we call Quad 4 trading on a regular basis, we make money at it, and we have very talented people in our organization to do. We also have good risk management systems to ensure that we understand what we're doing. So I wouldn't describe us as not being a trader. And I don't know if there's a definition, I think you used the word conservative. Look, we're a trader, but we do it in the order that I just described and have done it for a long time on a global basis. So it's a contributor to our earnings, and we continue to look to grow that part of our business.
Pierre Breber, CFO
The only thing I would add, Paul, to Mike's answer is shareholders and investors don't own Chevron or like companies for trading earnings. They tend to be volatile. I think the multiples on trading earnings historically have been very low. In fact, most of the large trading houses are private companies. So Mike described exactly what our strategy is; it works within the framework of a resource company and refining and petrochemicals company where investors are owning us for safely and reliably delivering energy, having the commodity price exposure. And yes, if we can enhance that with trading results, that's great, but we're not going to lead with trading. Thanks, Paul.
Operator, Operator
We'll take our next question from Sam Margolin with Wolfe Research.
Sam Margolin, Analyst
Good morning, thank you. I have a clarification question regarding your comments on the Permian. In the NOJV section, since you combine royalties with the NOJV acreage, does that mean the growth rate in the NOJV portion actually surpasses the growth rate reported by our partners? That's the correct interpretation, right? That's what we're trying to convey.
Mike Wirth, CEO
Yes. Our production includes not only our working interest but also our relatively high working interest in most of these ventures. This is similar to the working interest of the operator in many cases. Additionally, we benefit from a royalty advantage, which we report through the NOJV. The royalty barrels we mention are pure royalty, meaning we have no capital involved and no working interest. We simply collect royalty as the landowner. You are correct in your interpretation, Sam. This is why our NOJV is growing slightly faster than our co-op production given the same levels of activity.
Sam Margolin, Analyst
Okay. And then just as a follow-up. This is on capital allocation, and I understood that you have the range out there in the buyback. The range is pretty substantial, and there is a decision to make right now about where to be within the range about whether to preserve cash for an opportunity that might come in the downturn, if that's what looks like it's on the horizon or whether to stay at the top end because we're in sort of a market equilibrium in the commodity environment, and you feel good about the pace. And I'm not asking you to predict the future, but it would be great to sort of hear your thoughts directionally about the value of kind of preserving cash on the balance sheet for any day or maintaining a faster pace? Thanks.
Mike Wirth, CEO
Yeah, I'm going to invite Pierre to say a couple of words. But Sam, we tried to lay out a couple of cases at Investor Day that showed you in two different price environments, what our capacity was to operate and be within the range and with a low breakeven to cover our CapEx and dividend with a lot of surplus cash already on the balance sheet and then with the very low debt levels that we have. We've got plenty of capacity. Pierre, maybe you can just give a thumbnail recap on the scenarios to booking them for Sam.
Pierre Breber, CFO
At our Investor Day, we examined both high and low case scenarios, and currently, our guidance leans towards the higher end. I want to clarify that we do not plan to keep over $15 billion in cash on our balance sheet. We can effectively operate with $5 billion, meaning the excess cash is surplus and temporarily held. This cash will be returned to shareholders over time based on different scenarios and the prices we see. Retaining this surplus cash is economically inefficient; it belongs to our shareholders. Our goal is to redistribute it steadily, avoiding pro-cyclical actions. We’ve successfully eliminated all our debt, but this is a matter of timing. In the lower case scenario, averaging about $60 Brent, we can continue buybacks at the lower end of our range by reducing surplus cash and utilizing some of our excess debt capacity, as we are well within our 20% to 25% net debt ratio. We aim to move toward the lower end of our guidance range of 20% for a more efficient capital structure. We will always maintain a strong balance sheet, as we recognize the cyclical nature of this business. Our shareholders can rely on the dividend, which has been increasing for 36 consecutive years at a rate of 6% annually over the past 15 years. As we anticipate the upcoming cycle, we plan to return additional cash steadily, currently around 5% of our outstanding shares through buybacks. This is part of our strategy to manage volatility for our shareholders. Regarding M&A, we typically prefer to use equity due to the volatility in commodity prices, as it leads to more stable deal structures. Our balance sheet will remain robust enough to navigate commodity price fluctuations and ensure we are positioned to act as necessary. It's worth noting that we were the first to announce a transaction post-COVID with our acquisition of Noble Energy, followed by our acquisition of Renewable Energy Group a year later. Thank you, Sam.
Sam Margolin, Analyst
Thank you.
Operator, Operator
We'll take our next question from John Royall with JPMorgan.
John Royall, Analyst
Hi, good morning. Thanks for taking my question. So can you talk about the general demand trends you're seeing within your system? Are you starting to see any signs of weakness on the demand side? And if the answer is no, just curious on your views on what's happened to spot refining margins globally and what seems like still a relatively tight market.
Mike Wirth, CEO
Yeah. So John, a couple of thoughts, I guess. I'll just go by the product commodities. I mean gasoline demand is essentially back to pre-pandemic levels globally. Obviously, there are regional variations in this. We're sitting in California here on this end of the call. We've had a very wet winter. And so the first quarter reflects an unusually wet season on the West Coast. In Asia, we see demand coming back, right, as economies continue to open up and mobility has increased, etc. But broadly speaking, gasoline is flat. Diesel had kind of carried the complex through COVID and global demand has been at pre-pandemic levels for a while now. First quarter demand in '23 is a touch lower than it was in first quarter of '22. Could be an indicator of the beginning of some economic slowdown, but it's certainly, I think, premature to conclude that. But diesel is maybe not leading the parade quite as strongly as it had been for the last couple of years. Jet demand continues to grow. And it's still below kind of prepandemic levels. China is the place, obviously, as everybody has been paying attention to domestic travel up to nearly 90% of pre-COVID flights in and out of the country, still well below that. And we see flights being scheduled. You see indicators that suggest travel will grow. You listen to the airlines, and that certainly seems to be what they anticipate, but that's in progress. So that's a kind of a quick look across the product slate. I think margins reflect a couple of things. One, a year ago, we were in a period of recovering economies and we're coming out of a period of rationalizing refining capacity around the world. And you can go to any part of the world and find refineries that had shut down that perhaps people expected would close one day, but it happens relatively quickly. And at the same time, you saw big growth projects that had been deferred because of the uncertainty relative to COVID a year later here. You don't see refineries closing at the same rate. We've seen refinery startups in the Middle East. We've seen projects here in the U.S. and in Asia as well. So refining capacity coming into the system demand has moderated a little bit. Margins have come down. They're still stronger than historic margins if you look out over a longer period of time, but trending back down towards mid-cycle. Pretty strong in the U.S., maybe under a little more pressure in Asia, but you got to think about the feedstocks in Asia, where they're coming from, how they're priced, and how those markets are working. So I don't see any big warning signs flashing, but certainly, we're paying close attention to it.
John Royall, Analyst
Very helpful, Mike. Thank you. And then maybe sticking with the downstream, and you mentioned California. Can you just talk about the new regulations in California around the potential for excess profit penalties? Not sure if that's exactly how to refer to it. But how much does that impact how you think about refining in California and your position in California and maybe the expected impacts on the broader market there?
Mike Wirth, CEO
Certainly. The bottom line is that we are currently in a rule-making process regarding the regulations in California, and there is no immediate impact. This process is somewhat bureaucratic and may take a significant amount of time before we know how it will unfold. The initial attempt to establish a windfall profit tax was unsuccessful due to the requirement for a two-thirds vote in the legislature for any new taxes in California. It has since evolved into a focus at the Energy Commission, where a group will be formed to collect data and assess the industry's profitability against some yet-to-be-defined standards. This will take time and might lead to fines or penalties for profits exceeding certain levels, but it's uncertain how it will progress since much work remains to be done. There are a couple of aspects that seem predictable. First, there will be substantial new reporting requirements, and we will need to provide a lot of data. We are prepared to collaborate with the Energy Commission to ensure they receive the necessary information. Secondly, I don't believe these regulations will promote investment or new supply, which are essential for reducing prices over time in commodity markets. In fact, there's a risk that this could discourage investment and decrease supply, which, if demand stays the same, may increase volatility and likely lead to higher average prices in the long run. That's about all I can share at this moment, and we will continue to monitor the situation as it develops.
John Royall, Analyst
Thank you.
Operator, Operator
I'm sorry, we'll take our next question from Doug Leggate with Bank of America.
Unidentified Analyst, Analyst
Hey, good morning, guys. This is Kalei on for Doug. So thanks for taking the question. The first one is on the new Permian disclosure. So you guys are forecasting flat royalty volumes. So I'm wondering, as that becomes a smaller part of the production mix, how is the cash margin from that asset affected going forward?
Pierre Breber, CFO
Well, royalty barrels have essentially an infinite margin. And so I think if you and Doug can do the math, it's a slightly lower percentage than that will be a part offset, but there's lots of other drivers that we're doing to enhance margins. And we've shown return on capital employed near 30% at $60 Brent equivalent for our premium. So it's a high return low-carbon asset, and the royalty barrels, as you know, come with virtually no cost, and that's part of the advantage that we have.
Unidentified Analyst, Analyst
Understood. I appreciate that, Pierre. My second question goes to TCO. Just wondering if we can get an update on the timing of first oil from the new expansion projects and the dividend magnitude for 2023.
Mike Wirth, CEO
Yeah. So the expansion project, as I said, there's a lot of turnarounds in activity both this year and next year. And at our Investor Day, we laid out a bar chart that gave you an idea on production. The real I think the time, as I said earlier, when you're going to see the production growth will manifest itself in 2024 because the next two years, we've got a lot of these turnarounds, ties, etc., in place. So Pierre, you can guide on dividends.
Pierre Breber, CFO
There is no change to our affiliate dividend guidance that we shared during the last call, which remains at $5 billion to $6 billion for the full year. This includes TCO and our other affiliates. We anticipate a modest dividend in the second quarter, similar to last year, followed by a larger dividend in the fourth quarter. TCO continues to maintain a strong cash position on its balance sheet to navigate the ongoing uncertainties related to the project and transport alternatives, but we expect that cash to return over time. The performance has been strong, although we don’t provide specific yearly details as it is included in our overall affiliate dividend guidance.
Unidentified Analyst, Analyst
I appreciate that there's still some turnarounds to work through. But as the production hit a steady state, what do you expect the dividend cadence to look like?
Pierre Breber, CFO
So as I mentioned, last year there were two quarters. This year, it will again be the second and fourth quarters, and it will be up to the TCO Board of Directors to make the decisions going forward. Thank you for your questions.
Operator, Operator
Our next question comes from Josh Silverstein with UBS.
Josh Silverstein, Analyst
Good morning, guys. Just curious about the pace of rig activity in the Permian. You guys are adding one per quarter this year. Outage to be to support growth next year. I'm just curious, as you continue looking forward into next year, do you need to add four more rigs next year to keep kind of that 10% growth pace? Is it less because you're getting more efficient in the Delaware production? I'm just curious how you're thinking about the step-up in activity going forward.
Mike Wirth, CEO
Yeah. I mean we've pulled rigs down dramatically in 2020, and we didn't want to surge back with everything all at once. And so we entered this year with 10; we expect to exit this year with 14 COOP rigs running. And I think consistent with the longer-term production profile that we've outlined, we've got a big base business that does have decline underneath it. And so you're going to expect us to add some additional rigs as we move into '24.
Josh Silverstein, Analyst
Got it. And I know there's a lot of activity stepping up across the rest of the Lower 48 Haynesville, DJ. They're a little bit more on the gassier side. I'm curious if you guys are pulling back any activity because there are a little bit more gas from in this price environment. Thanks.
Pierre Breber, CFO
We are adding a rig in the Haynesville, a development we have been planning for some time. Gas prices are likely to fluctuate, and it’s essential for us to start developing that resource. We have some neighboring operators, and if we don’t act now, it’s the right time for us to do so. The DJ still has a significant liquids component, and our plans remain unchanged. In fact, we anticipate increased production in the second half of the year in both the DJ and Argentina, where we are slightly ramping up activity. All of this falls within our existing capital expenditure budget.
Mike Wirth, CEO
Thanks, Josh.
Operator, Operator
We'll go next to Ryan Todd with Piper Sandler.
Ryan Todd, Analyst
Thanks. Maybe first off, just a quick follow-up on the comments earlier on and the question on trading, in the international downstream, your earnings were particularly strong this quarter. And I think in the slides there, there's a $270 million other bar, positive other borrowing chart there. Is that primarily trading? And anything to read on that going forward? Is that something that likely reverses or maybe some clarity there?
Pierre Breber, CFO
You're correct, and we acknowledged that. I wouldn't say it's the primary factor; there are numerous influences, and we pointed that out. It aligns with how Mike described our trading business, which, like all trading businesses, can be variable in future quarters. It's just one of many factors. We wanted to mention it as one of the elements contributing to the other variance.
Ryan Todd, Analyst
Thanks, Pierre. Regarding the Permian, you've discussed the changes in the 2023 development plan compared to 2022. I think we understand some of the short-term effects. Can you explain the longer-term consequences of moving towards more single bench development, adjusting pacing, and shifting focus towards New Mexico? Does increasing single bench development affect the productivity or recovery of other zones nearby? How does this change your perspective on service infrastructure, logistics, and resource depth in various parts of the portfolio for the long term?
Mike Wirth, CEO
Yeah, Ryan, I would say not really. We've always been return-seeking. And so this is all about optimizing the return we can get out of this asset over the long haul. We've tried to be thoughtful about surface infrastructure. We've tried to be thoughtful about drilling to keep surface infrastructure fully utilized, not overbuilding it for peaks and then leaving it underutilized for long periods of time. And as we're continuing to learn, the fundamental principles about optimizing return on investment continue to drive all of this activity. So as we learn more about benches, about communication, about productivity as technology changes, recovery factors, we will continue to apply all of those learnings. But the real objective remains the same. It's not volume; it's value and returns.
Pierre Breber, CFO
Ryan, and just as a reminder, the move to more single bench is in the Delaware Basin, right? Midland Basin three quarters is multibench development.
Ryan Todd, Analyst
Thanks, Pierre.
Operator, Operator
We'll take our next question from Jason Gabelman with TD Cowen.
Jason Gabelman, Analyst
Hey, good morning. Thanks for taking my questions. Sorry to go back to the Permian, but I'm going to ask another. I was wondering, and I appreciate all the disclosures are really helpful. But in terms of the non-op component of production, does the proportion stay relatively stable through your forecast period? I think you gave a forecast out to 2027 at the Analyst Day. Does the non-op proportion stay the same? Or do you have more operational barrels between now in '27?
Mike Wirth, CEO
Yeah. It stays relatively similar, I would say, Jason. We can provide further insights on that as we. There's not a big shift. We're growing activity. As I mentioned earlier, we're adding rigs and you got a pretty big base you're adding on top of. So those percentages don't move a lot.
Jason Gabelman, Analyst
All right. That's helpful. And then just one accounting question. Depreciation fell decently quarter-over-quarter in upstream. What was that related to?
Pierre Breber, CFO
Are you looking at it excluding special items?
Jason Gabelman, Analyst
Yeah. If I look at the quarter-over-quarter, Slide 7, Upstream DD&A was positive $345 million.
Pierre Breber, CFO
Yeah, why don't you follow up with Jake? That could be tied to some exploration activity.
Operator, Operator
We'll take our next question from Biraj Borkhataria with Royal Bank of Canada.
Biraj Borkhataria, Analyst
Hi there. Thanks for taking my questions. I wanted to ask about Namibia. You recently farmed in a few months ago. Could you just walk me through plans for the next 12 months or so, what you've got penciled in? And then I've got a follow-up on something else. Thank you.
Mike Wirth, CEO
Sure. So we've completed seismic acquisition in Namibia at the end of February, and that's being processed right now. And so I can't really comment any further on that. We certainly are mindful of others who have had certain exploration success in the region, which is encouraging, but we need to do the work on that and then determine what the next steps are, which can include drilling exploration wells. So stay tuned on that as we got more information, we'll share it with you, Biraj.
Biraj Borkhataria, Analyst
Okay. And then just on a different topic, cost inflation because more and more you hear some of the service providers talking about improving pricing and so on. So could you just comment on your latest thoughts and what you're seeing on the cost inflation side outside of the Lower 48? Thank you.
Mike Wirth, CEO
Sure. So really no change to our mid-single-digit inflation guidance in our current year capital spending. As you note, in the Lower 48, there are some areas where we planned for higher inflation, and we're seeing that. I'll remind you that a lot of what we do in our procurement activities are longer-term contracts that are either fixed price or index-based. We've got detailed cost models to challenge price increases. We commit volumes to certain things over longer periods of time to try to create a win-win between us and our suppliers. And so we've not seen some of the cost push through that you would see if you were buying services or commodities inputs on a spot basis or on a current basis because we manage that activity differently. For instance, on offshore rigs, we're fully contracted for this year. We came into the year with three rigs working in the Gulf of Mexico. They're generally below current market rates. And so I think we're managing this well. The one thing I would say is given these kinds of index-based contracts, there are periodic reviews where we will reset based on market indicators. And so in the second quarter in certain parts of our business, we'll be going through this with some of our partners, and we'll see some resets on there that will probably reflect a little bit of the inflation that I referred to earlier that's already built into our plans. But I think we're managing all that within the range that is embedded in the guidance we've given you.
Biraj Borkhataria, Analyst
Thank you very much.
Mike Wirth, CEO
Thank you, Biraj.
Operator, Operator
Thank you. We'll take our last question from Neal Dingmann with Truist Securities.
Unidentified Analyst, Analyst
Hi, this is Patrick on behalf of Neil Dingmann. For my question, it's with respect to Venezuelan exports. I know previously, you made mention really no further capital investments in Venezuela. What we're curious to know is there a maximum threshold of exports and sales that you're anticipating out of Venezuela?
Mike Wirth, CEO
There is a limit based on our position and the entities we are involved with, as well as our share of the production that we can market. Currently, we are seeing about 100,000 barrels a day of production, an increase from around 50,000 when the license term changed. This could potentially rise further this year, possibly by another 50% if everything goes well. The crude is being sent to the U.S., and we are finding a market for it. It’s a six-month license from OPEC, which we need to keep in mind. Therefore, we are moving forward as mentioned, using some past receivables from these proceeds, and there are several relatively simple workovers and other activities that can help increase production without major capital investments. That's our current model. We will see how things progress and hope for a positive outcome, but it has been somewhat volatile, so we need to approach this gradually.
Unidentified Analyst, Analyst
It's tough here. I guess just as a follow-up, are you exploring the six-month term? Are you considering extending that, or is it too early for negotiations?
Mike Wirth, CEO
That's a decision made by the U.S. government. It's not really a negotiation. It's their decision, and it's a policy matter. We're asked for input and so we provide input on these things. But for the last several years, these things have had relatively short time lines associated with them. And so we're in full compliance with all the conditions of the sanctions and intend to stay that way. And we'll just see how the policy-making turns out.
Pierre Breber, CFO
This is Pierre. I'm going to go back to Jason's question. So yeah, lower depreciation is really three drivers. Some of it was the absence of some abandonment accruals that were in the fourth quarter. So you can view those as sort of nonrecurring. And then some of it is due to new rates. So each year we revised our depreciation rates based on additions to proved reserves, and those rates are a little bit lower. And then, of course, first quarter production was a little bit lower than fourth quarter production. So lower volumes also contributed to that lower depreciation.
Jake Spiering, General Manager of Investor Relations
I would like to thank everyone for your time today. We appreciate your interest in Chevron and your participation on today's call. Please stay safe and healthy. Katie, back to you.
Operator, Operator
Thank you. This concludes Chevron's first quarter 2023 earnings conference call. You may now disconnect.