Earnings Call Transcript
CHEVRON CORP (CVX)
Earnings Call Transcript - CVX Q1 2020
Operator, Operator
Good morning. My name is Jonathan and I will be your conference facilitator today. Welcome to Chevron’s First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ remarks, there will be a question-and-answer session. As a reminder, this conference call is being recorded. I will now turn the conference call over to your host for today’s program, the General Manager of Investor Relations of Chevron Corporation, Mr. Wayne Borduin. Please go ahead.
Wayne Borduin, General Manager of Investor Relations
Thank you, Jonathan. Welcome to Chevron’s first quarter earnings conference call and webcast. Our Chairman and CEO, Mike Wirth, and CFO, Pierre Breber are on the call with me. We will refer to the slides that are available on Chevron’s website. Before we get started, please be reminded that this presentation contains estimates, projections and other Forward-Looking Statements. Please review the cautionary statement on Slide 2. Now, I will turn it over to Mike.
Michael Wirth, CEO
Alright. Thanks, Wayne. Before we get started, I hope you and your loved ones are safe and healthy. Our thoughts are with all the families affected by COVID-19 and especially with the healthcare workers on the frontlines battling every day to contain the outbreak. I’m also incredibly grateful to our employees who show up every day, particularly those out in the field, operating critical facilities to provide the energy that supports the pandemic response and keeps essential goods and services flowing in support of the economy. They too are heroes. During our security analysts meeting in March, we discussed Chevron’s resilience. And now it is time for us to demonstrate it. No one foresaw these specific market conditions, but we were prepared for them. We know what to do, and we are doing it as we execute this five point action plan. First and foremost, we are focused on the safety of our employees and our operations. Next, we are exercising flexibility in our capital program. Today, we are further lowering our full-year guidance. In addition to capital costs, which always matter in a commodity business, we initiated a major company restructuring last year, and we expect to drive additional savings this year and next. Capital structure also matters. We came into this crisis with an industry-leading balance sheet, and we are taking actions intended to maintain financial strength. Lastly, while addressing current market conditions, we are preserving long-term value for shareholders, employees, and other stakeholders. I will speak to each element of this action plan in the following slides beginning with safe and reliable operations on Slide 4. We have had fewer than 50 confirmed cases of employees with the virus, and nearly all cases appear to have been contracted outside the workplace. Most of our office-based employees are able to work from home. For those who continue working at facilities or in the field, we have implemented multi-layer screening, distancing, hygiene, and PPE protocols. Our COVID-19 testing capability is ramping up. Finally, we are helping our communities with donations of money, PPE and other things we can manufacture like sanitizers in our plants and 3D printed face shields.
Pierre Breber, CFO
Thanks, Mike. Turning to Slide 10. First quarter earnings were $3.6 billion, or $1.93 per share. Adjusted earnings, which exclude special items in foreign exchange, were $2.4 billion, or $1.29 per share. A reconciliation of non-GAAP measures can be found in the appendix to this presentation. Cash flow from operations was $4.7 billion and total capital spending was $4.4 billion. In the quarter, we also increased our dividend and repurchased $1.75 billion of shares, before suspending the share repurchase program. Turning into cash flow, excluding working capital, cash flow from operations covered the dividend and cash CapEx in the first quarter, yielding a dividend breakeven under $50 Brent. Proceeds from the sales of our interest in Malampaya were offset by loans to TCL. Given volatile market conditions, we are holding more cash and ended the quarter with a net debt ratio of 14%.
Wayne Borduin, General Manager of Investor Relations
Thanks, Pierre. That concludes our prepared remarks. We are now ready to take your questions. Keep in mind that we do have a full queue. So please try to limit yourself to one question and one follow-up if necessary. We will do our best to get all of your questions answered. Jonathan, please open the lines.
Operator, Operator
Certainly. Our first question comes from the line of Phil Gresh from JP Morgan.
Phil Gresh, Analyst
So first question here just as we look at that slide really talking about the $30 oil case. And the funding of the dividend, the priority of the dividend and adding debt to cover capital spending. At the end of that period, do you have a sense of…
Michael Wirth, CEO
Phil, you cut out. When you said at the end of that period, do you have a sense of.
Operator, Operator
Mr. Gresh, we are not hearing you right now. I’m not sure if it is your connection or your phone.
Michael Wirth, CEO
Okay. Jonathan, we can move on to the next question. If he can come back and clarify that we got a good connection with him.
Operator, Operator
Our next question comes from the line of Devin McDermott from Morgan Stanley. Your question please.
Devin McDermott, Analyst
I wasn’t on mute, but there, but it seems like it wasn’t going through. If you hear me now with the, I will try to pick up where I think Phil left off on the stress test for $30 Brent. When we think about where this the stress test takes you from a leverage standpoint, or debt to capital standpoint over that two-year period. He talked a little bit about where you would end up at the end of 2021 and also where you would be comfortable in terms of taking leverage to and what…
Michael Wirth, CEO
Yes, I think we got the essence of it, which is where do you end up at the end of 2021 and how comfortable are you there? Pierre Breber do you want to respond to that?
Pierre Breber, CFO
Yes. So, thanks for the question. Look, the chart on the left gives an indication of the negative cash flow that we expect under a stress test at $30 Brent, and then the chart on the right shows our debt position relative to peers and relative to the zero line which has a net debt ratio of 25%. When you put the two together, where the negative cash flow or that incremental debt keeps us - we are still to the right of that zero line. In other words, we can have two years at $30 Brent, invest in the business, sustain our dividend and still exit at the end of 2021 with a net debt ratio less than 25%, which we think is still a very strong balance sheet.
Michael Wirth, CEO
Yes, I might just add Devin. We are protecting the dividends because we are set up to do so and we have made it a priority. As Pierre said, we entered with balance sheet strength that is second to none and an advantaged portfolio with a low breakeven capital discipline. That is part of our DNA. We have demonstrated it through the way we have managed capital spending, our discipline on transactions, and we have got capital flexibility. All of this is because we are committed to the dividend, and you can see that while we do lean on the balance sheet to fund the capital program, over this period of time, we can support the dividend comfortably and still remain in a very healthy position and we have set ourselves up to do so. Thanks, Devin, did you have a follow-up?
Devin McDermott, Analyst
Yes. So, a follow-up just on the capital spending side building down a little bit. So, you talked a little bit about how you think about the tradeoff between some of the near-term cuts in capital spending, which really skewed more towards short cycle versus one of your priorities of retaining long-term optionality and continue to support longer term growth. So, that preservation of long-term value point. How do you think about that trade-off and also how much additional flexibility, if any, is there as you look at the budget where it stands today?
Michael Wirth, CEO
Yes, Devin. So, a few years ago, we really had a budget that was skewed towards the long-term end of the spectrum, and we have consciously shifted that now to have the short-term weighting much higher within our portfolio because it gives us the flexibility that you talked about, and it is underpinned with the longer-term projects, but it is not dominated by those. So, we have built a more flexible portfolio that allows us to slow down the short cycle investments when the market signals indicate that those are not being rewarded in the marketplace, and yet we are maintaining the ability to ramp those up. We have longer-term capital projects that are earlier in the phase, and we will be very disciplined in bringing those forward. The other thing that is different that is really important is a much larger percentage of our portfolio now is facility-limited versus reservoir-limited and characterized by the kinds of declines that you can see in a different portfolio. That enables us to hold production with more modest capital spend and preserve the cash flow that is associated with that. So, look, we are conscious of things like leases, we are conscious of the way we are developing our resources, but we are trading those things off and when the market is not calling for near-term production, we shouldn’t be investing to deliver it. We should be conserving the cash for another day and that is really how we are balancing this out. Thanks, Devin.
Devin McDermott, Analyst
Great. Thank you.
Operator, Operator
Thank you. Our next question comes from the line of Doug Leggate, Bank of America. Your question please.
Michael Wirth, CEO
Doug, we are still challenged here with this audio situation. I’m afraid we are not hearing you. I apologize for this. Jonathan, can we try to…
Pierre Breber, CFO
Yes, Jonathan, why don’t we pivot to the next question? The next in the queue.
Operator, Operator
Okay. Our next question comes from the line of Neil Mehta from Goldman Sachs. Your question please.
Neil Mehta, Analyst
Alright. Well, thank you. So I guess the first question was around curtailments. And can you walk us through with a little more depth about where they are in magnitude? And as we think about production shut-ins, what gives us confidence that there won’t be any structural damage to the assets and we have confidence that supply can return when the market ultimately needs it?
Michael Wirth, CEO
Sure. And so let me just frame it up a little bit, Neil. I was just talking to Devin about balancing cash flow and long-term value, and that is certainly a key driver here as we are looking at curtailments. We are trying to avoid the need for abrupt shut-ins. So these truly are broadly speaking curtailments rather than shut-ins, with a very conscious effort to preserve reservoir and well integrity. We do these things for turnarounds for storms and the like. So we know how to do this quite well. We really don’t expect any issues as we ramp backup. Curtailments in April were relatively modest, as Pierre outlined with forward guidance; May and June look like they could be more significant. About 50/50 between the U.S. and the rest of the world. Certainly in the U.S., the Permian and the short cycle piece of it is the predominant part. Around the rest of the world, they tend to be related to OPEC and OPEC Plus commitments in the way those are translating into local conditions. But we are very cognizant of where and how we slow production and expect to be able to return production when the market changes in relatively short order without putting reservoir well integrity at risk.
Neil Mehta, Analyst
We see that you put a pause on the project or at least slow down spending. So, can we do a status check of how far you have gotten so far, and how it is progressing? What the ultimate plan is around execution from here, and any early thoughts on what that slowdown could mean for the full project budget?
Michael Wirth, CEO
Sure. So the project is about 75% complete right now, Neil, construction is 56 or so percent. Logistics are working very well, as I said, there are only seven modules left in Korea and all of those will have departed by the end of this quarter. We have got a number on the water, additional ones at the transshipment locations and some moving through the waterways. So the logistics are moving quite well. Since late 2019, we have got all of the pipe racks and the gas turbine generators and utility modules on foundation and we continue to work on the critical path. Locally, I mentioned we have seen COVID cases in a number of the camps, there are over 100 different residential camps there. As a result, we are demobilizing non-essential staff to minimize the risk of spread. That means we are demobilizing about 17,000 people to 20 different locations. Most of these are contractors, not employees of TCO. But we are helping to manage the logistics. We are moving people back to other parts of Kazakhstan, Turkey, Russia, Singapore, the UK. We need to provide context tracing information for everybody who demobilizes; we have converted a fire station and a test center. We are testing 1,500 people a day. We have got 29 nurses there working around the clock. So a very thoughtful effort on how we demobilize. The people that are remaining are working, in essence under a pod strategy where the workforce is isolated by shift and by crew. We have boxed meals, digital permits, dedicated drivers and cleaners to really reduce the risk; employees are all outfitted in proper PPE and alike. We are actually maintaining pretty good schedule progress on the critical path in spite of all of this, which allows us to focus the workforce on critical path. And to demobilize some of the non-critical path activity. Our power and control work, the gathering system, the sour gas injection system are all several months ahead of the critical path. That enables us to slow down and mitigate some of these risks. The biggest challenges are in the area of crew changes. We have people working on some extended rotations; transit in and out in the labyrinth of travel restrictions of each level, cities, countries, etc. is something we are managing aggressively and carefully. We are testing people as they arrive to minimize quarantine on arrival. A very focused and thus far, I would say a very successful effort to respond to this. The main focus is on the pressure boost facility and the utilities in the processing plant, which are on the critical path. In terms of the actual reduction in C&E, our share is about a billion dollars, about half of that is a deferral of activity. About a third of that is mitigation of cost growth through aggressive creative measures. The balance is really related to foreign exchange. So hopefully that gives you a sense of where we are, and certainly as we go forward on every call, we will know more, we will see how things have unfolded there, and we will provide you additional information as we have it.
Pierre Breber, CFO
Thanks Neil.
Operator, Operator
Thank you. And our next question comes from line Jeanine Wai from Barclays. Your question please.
Jeanine Wai, Analyst
So, my first question now that you can hear me is on sustaining CapEx. And we know, Mike, that you don’t really talk about sustaining CapEx on a one year basis at all. But can you comment on whether the new 12 billion annualized CapEx run rate is enough to maintain what you would consider acceptable reserve replacement ratio over a longer-term period and whether this can also allow you to achieve your corporate objectives of increasing RSE, shareholder returns and all that, but maybe at a different rate from what you thought before?
Michael Wirth, CEO
Yes, Jeanine, you are correct. This really isn’t a way that we think about the business; it is not something we rely on or plan around to measure the business. So, it is not a simple question to answer because it is just not how we think about things. We do understand it is a question among some in the investment community, Pierre has been thinking about how to try to help you guys understand this a little bit better and translate from how we run the business to how these questions come in. So Pierre, maybe you can help Jeanine with that.
Pierre Breber, CFO
Yes. Thanks, Jeanine. And as Mike says, we don’t think about the business that way, and to the earlier question, we are not sustaining short-term production, right, that is a very deliberate choice. Mike talked about how the price signal says we don’t need short-term production, and we are prioritizing capital on long-term value. So, again if sustaining short-term production is part of the definition, then it is just not how we manage the business as we are trying to balance the short term and the long term. But if we think of sustaining capital as kind of an analytical construct, that is really the capital to keep upstream production capacity flat from existing fields for a number of years. In that definition, I would exclude exploration, I would exclude capital to develop new fields or for expansions like into in 10 GIS, I would exclude assets that are sold or contracts that are going to expire and I would exclude downstream and chemicals. If you go through that, we talked about 11 billion for upstream based business and shale and tight total capital, and that results in some growth; about 10 billion would be a reasonable estimate of the capital to keep that production capacity flat from existing fields for a number of years. Again, we are below that right now. We started with bass and shale and tied at 11. If you roll through the reductions, we will be under eight. Again, short-term production we do not expect to be sustained at your kind of notional $12 billion capital, which includes downstream and chemicals with some cuts and exploration, but long-term value is preserved.
Michael Wirth, CEO
Did you have a follow up, Jeanine?
Pierre Breber, CFO
No.
Michael Wirth, CEO
Okay, fine. Next question.
Operator, Operator
Alright. Our next question comes from the line of Paul Cheng from Scotia Bank. Your question please.
Michael Wirth, CEO
We will be patient here because it seems like it takes 15 or 20 seconds for this to start. So Paul, hang in there and we are waiting on you.
Paul Cheng, Analyst
I think since that potentially we will cut off, so I would ask both questions. I think the first one Mike, not that you will have a target now, but that the sector is being compressed and a lot of your peers are under distress. If there is one view, how much is the balance sheet you are willing to risk in this current moment for the right deal at all? And the second question, may as well ask that first, in case I get cut off. This is for Pierre. You have a strong balance sheet, but it looks like you are going to have a substantial cash burn for this year, next year, and three depressed pricing in the moment that we see. You raise some debt, but you make sense for you, given the debt market has actually opened and the cost is quite low for you at this point to raise even more debt to pre-fund the potential cash burn or do you think the commercial market is available and you don’t need to do that?
Michael Wirth, CEO
Okay, yes, Paul, you are an experienced multi-part questioner. So I think that was good to get both of those in. Let me give you a quick response and then Pierre, I’m sure will have some thoughts he would like to add there. The reason we showed this low prices stress test Paul was to give you a sense that we really can endure a couple of years of really tough pricing, and our gearing would move back to a level that is not uncomfortable to be at. In fact, Pierre said frequently, that overtime we would anticipate moving our gearing back into the kind of 20% to 25% range. Anyway, now this isn’t necessarily the way we thought we would get there. But that is not an uncomfortable place for us to be. So leaning on the balance sheet through this period of time is something that is very doable that will maintain a strong credit rating as we do that. We are certainly willing to go there. And as you know, in years gone by, you go back a few years ago, our gearing was above that 25%. I think we are in a range that we have demonstrated we can manage, and we know how to. In terms of going to debt markets at low cost, I do think it is prudent to look at that. Debt is attractively priced right now, and it wouldn’t be surprising for us to look to add to that. So Pierre, maybe you can comment on that.
Pierre Breber, CFO
Yes, I think there was an M&A question there about using our balance sheet for M&A. But that I think I can just address. You can also use equity as part of a transaction, so we don’t view the balance sheet as the only means to do M&A, because equity makes sense in an oil deal where there is price risk and obviously price volatility and you wouldn’t want a winner and loser between the buyer and the seller on an M&A deal. In terms of, I think Mike addressed the debt question. I mean, as we consume cash, we will lengthen the maturities, we will look at when there is a good window to approach the bond markets. We do have access to a lot of commercial paper that was shown on the liquidity side. Commercial paper still remains the lowest cost and the most flexible source of funding for us. But under these kinds of conditions, and if the conditions persist, we would want to have some more longer-term debt that would be appropriate. And I think as Mike said, you shouldn’t be surprised if you see us approach the market.
Michael Wirth, CEO
Thanks Paul. I’m sorry, I missed the M&A angle on your first question. Okay, let us go to next question.
Operator, Operator
Our next question comes from the line Paul Sankey from Mizuho. Your question please.
Pierre Breber, CFO
Hang in there Paul, for some reason we are still working through the delay. Paul, we are ready for your question.
Paul Sankey, Analyst
Hello, can you hear me?
Michael Wirth, CEO
Yes. We have got you, Paul.
Paul Sankey, Analyst
The question is, how has the world changed for you post this thing? Obviously, we can see the futures strips are pressured for 2021. And I think you have addressed that a little bit. I think it is clear that your mega projects Australia, Kazakhstan sort of continue as they were, and ultimately have very low breakevens when they are running. I guess the question would be, firstly on the Gulf of Mexico is the world do you think different there? And most importantly, obviously, for your company, we know that you wanted to buy Anadarko for the acreage in the Permian. How do you think that the world has changed with regards to the Permian given what is happening? Thank you.
Michael Wirth, CEO
Okay, thank you, Paul. Well, I think when you are in the depth of something as unprecedented as this, it is hard to say exactly how the world will change on the other side of it. As much as it feels like this has been going on for a long time, we are really just a couple of months into it. And so I think on the other side of it, I’m an optimist. I have great confidence with all the resources being dedicated to vaccine development and therapeutics and testing capacity. I’m an optimist that in time the health risks will be successfully mitigated and managed. I believe that the world will return to some post-Corona Virus form of normal, and that means economic activity. It means growth, it means travel. The pace and the patterns at which that reemerge are I think are still open to a wide range of views, and I don’t know that anybody can predict that exactly. But when you translate that back to our industry, I think it plays into some things that we have long believed, which is low cost of supply matters. Operational excellence and discipline in project execution matter, capital discipline matters, cost discipline matters, and all of those things will become very apparent as we recover in some form with inventory length in the market with OPEC production off and with the opportunity for shale and tight to come back in relatively rapidly. I think the term lower for longer has been used for a while to describe conditions. I think that is even more appropriate today than it has been in past times when it has been used. I think we need to be very focused on an efficient use of every one of our resources to operate well and drive the cost of supplies down in a world that looks like it will be pretty well supplied. So, you get to the Gulf of Mexico and the Gulf of Mexico has been resetting its cost structure to compete in a world like this. I think it means we have got more work to do to make the Gulf of Mexico compete even more, more focus on tiebacks, infill drilling, utilizing existing infrastructure and finding efficient ways to develop in the Gulf of Mexico and so that trend is one that we need to stay on. We have made a lot of progress, and I think there is more work to be done there. In the Permian, we are not done improving in the Permian. Our results, even as we sit here today, continue to improve and so well costs come down, drilling efficiency improves, completion design, and execution improves, and the hydrocarbons haven’t gone away the rocks don’t go bankrupt, and companies might, but the rocks won’t. That is a resource that will continue to be very important in the overall supply picture and certainly, it will be for our company. So, we will look to invest in the very best projects, we will look to acquire assets and opportunities, be they through exploration or other means, that will compete in our portfolio and continue to be attractive in a world where low cost of supply and the ability to generate good returns matter. So, in some ways, those fundamentals are only more important going forward than they have been Paul and beyond that. I think it is speculation on a lot of the other things you hear people talking about.
Pierre Breber, CFO
Okay, so we are going to pull an audible here. I have actually got Doug Leggett’s questions keyed up; he had trouble dialing back in, so he texted me his questions, Mike. I’m going to feed them to you that way. The first one was for Mike; shale thinks the whole industry needs a reset, a change in long-term supply, etc. They just cut the dividend to adapt. What do you think of the big picture at this point? And then the second one will be for Pierre.
Michael Wirth, CEO
Okay, look, I think everybody is - it is interesting, Doug and apologies we couldn’t get you on the phone directly here. I wish we could have the conversation directly. I think we have actually seen more of a divergence in strategies and thinking among companies in our industry over the last few years, and we haven’t a long time. Everybody’s got a slightly different take on where they are going and where their strengths are. I can’t speak for another company. I will just tell you, it is very similar to what I was saying in response to Paul Sankey's question. I think the companies that can be reliable efficient low-cost providers will continue to have a very strong position as leaders in our industry. The world is not ready to transition to another source of energy in large part anytime soon. The resumption of economic growth will require the sources of energy that we know today and that fuel the world today. There will be a need for what we do. I think you have to be very honest with yourself about where you are going and where you are not. You have got to focus on improving in closing gaps where you need to improve and getting even better where you have strengths. Again, it kind of gets back to the fundamentals; capital discipline, cost discipline, project execution, and the ability. I would say it, if we haven’t said it clearly enough. Your balance sheet is a great asset. Oftentimes we think of our upstream or downstream assets as the most important asset and they are very, very important in our business. The balance sheet is also a very important asset; you have to treat it with a priority, you have to be prepared for the day when you need to rely on that asset, and I think that also becomes very, very important, as we move forward. We have been prudent in the way we have managed that; we were positioned differently than others as we went into this. While we wouldn’t have predicted this exact market scenario, we were prepared for an environment like this. We will navigate our way through it with our shareholders in mind. Second question.
Pierre Breber, CFO
Yes. Second question is around cash CapEx, of the $14 billion guide, how much of that is cash CapEx? And how much further can that go down without impeding cash flow in production? Yes, so again, sorry Doug, we couldn’t get you on. So that 9.3 billion is the cash CapEx equivalent to 14. It was 10.5 at 16. It went down 1.2 of the 2 billion additional reduction in cash capital. I think Mike has addressed that; I addressed it with sustaining CapEx. Again, at the CapEx levels into Jeanine’s question when we are at $12 billion when you back out reduced downstream and exploration, we are below the level to sustain short-term production. Again, that is a deliberate decision because there is not a lot of value in putting capital that results in production at current prices. We are investing, and I should have said to Jeanine’s answer, although we are below the $10 billion let’s call sustaining capital on bass and shale and tight which will cause some decline. We are investing in TCO, FGP/WPMP which will come on in 2022 and 2023 and provides that kind of long-term value. The choices that Mike and the leadership team are making are really balancing the short-term and the long-term and being thoughtful about where the capital reductions are and where the capital investments are.
Michael Wirth, CEO
Thanks, Doug, for your questions. Jonathan, we will pick the next one in the queue.
Operator, Operator
Certainly. Our next question comes from the line of Pavel Molchanov from Raymond James. Your question please.
Pavel Molchanov, Analyst
Thanks for taking the question. Along the lines of what you said about the energy transition you know not being as realistic perhaps as what a lot of folks are saying. Your CO2 targets assumed pre-COVID production rate, given that across the board volumes will be coming down. Are you looking to upsize those decarbonization targets that you put out last summer?
Michael Wirth, CEO
Yes, Pavel, it is interesting. Everybody in the industry has defined their targets just a little bit differently. And we haven’t actually put out absolute targets, which you would expect absolute greenhouse gas emissions to come down if people are restricting activity. We put out intensity targets; greenhouse gas emissions per unit of production. We had a target for per barrel of oil in the upstream and we had a target performance for gas production. We have got flaring and methane emission targets, all of which are unit targets that drive down unit emissions. We have not reset those; we would expect that we will continue to reduce our greenhouse gas emissions, irrespective of COVID or any of these other circumstances; these are commitments we have made, we have tied people’s compensation to them, and we intend to continue to reduce our emissions footprint.
Pierre Breber, CFO
Just to add to the other distinction is that we have done it on an equity basis. So whether we operate or don’t operate, all the barrels or all the MCS are in those intensity metrics that Mike talked about, not just our operated barrels.
Pavel Molchanov, Analyst
Alan, if I may. Is there any change in the historical linkage between Asian LNG prices and Brent crude given what has happened in the last 60 days?
Michael Wirth, CEO
Probably contracts have not changed, and of course, we sell most of our volume on contract. Our contracts typically are linked to not linked to Brent directly, but linked to JCC or Japanese crude cocktail; another one is linked to a JKM index, which is a gas-related index. I think commodity prices have some sympathetic relationship with one another, but they are not always perfectly correlated. You would certainly say that our crude-linked contracts will reflect crude prices and to the extent Brent has come off, eventually our crude-linked contracts will reflect that; they tend to be on a lag basis and don’t always reflect current month pricing. Broadly speaking, yes, you will see a connection between those two.
Operator, Operator
Thank you. Our next question comes from the line of Doug Terreson from Evercore.
Doug Terreson, Analyst
Good morning everybody. Mike, you guys were an early and a power adopter of the disciplined capital management model, and that has obviously served your shareholders well during the upturn, and now the downturn too. So first, kudos to you guys for that. Then to the points about industry stress I think Paul brought up earlier, which often lead to consolidation. My question is well, financial benefits are often available on a variety of transactions, strategic benefits on the scale that you guys received from Golf and Texaco and Unocal back in the day may or may not be this time around. I want to see if you find a strategic condition today; how you think it is similar or different from the prior downturns given your history. Also, any other notable color or philosophy that you want to share on this topic?
Michael Wirth, CEO
So, I guess if you go back all the way to Golf, and that takes you back to the 80s, the industry was highly fragmented even amongst the largest players. There were, as you say, financial benefits of consolidation and there were strategic benefits as you brought together portfolios that had gaps in them. We certainly saw that with Gulf, we saw it again with Texaco; I think today we have got fewer large players. The impact of any single transaction is not amongst large players, and those are pretty hard to do as you get down to small numbers. They are less profound both from a financial standpoint simply because you don’t have the same scale that you are consolidating and it flows through to the asset portfolios. The players that like ourselves and our big peers have exposure to many basins around the world to all segments of the value chain. Everybody has worked to try to optimize their portfolios in a way that fits with their strategy. I think your point is a good one; you can do kind of rifle shots, that would be maybe smaller bore both on the financial and the strategic dimension that could fill in nicely. But things that would be transformative the way we saw back around the 99 and 2000 period; I think you are right, that is a lot harder to envision today. Everybody’s become more efficient even the synergies that we saw back then; our technology was different, information technology was different, our productivity was different. Competition has made everybody sharper and more efficient; financial synergies are harder to capture.
Doug Terreson, Analyst
Okay. Thanks for the color Mike.
Operator, Operator
Our next question comes from the line of Biraj Borkhataria from RBC. Your question please.
Biraj Borkhataria, Analyst
So, I will get my two questions just in case. The first one is on the Permian and shut-ins driven by economics. So, I guess you mentioned that 50% of the curtailment is in the U.S. and then most of that is the Permian. I was wondering if you could talk about the process on how you got to the number you are looking to curtail and why that is the appropriate number for the environment. You see, that would be the first question. The second question is on your CapEx reduction. Obviously, part of this is economics, but there is another element which is not necessarily choice. So, you mentioned slowing down and then 10 GIS. I was wondering if there is an element of the CapEx or quantify the element of CapEx that is simply CapEx that you couldn’t spend even if you wanted to for logistical reasons or otherwise; just trying to get a sense of that would be helpful?
Michael Wirth, CEO
Yes. Okay. Well on Permian curtailment we have said we have pulled capital down significantly so we are not putting capital into bringing new production online. As you are looking at flowing production, not every barrel is created equally; we have got some older vertical wells, for instance, that in this kind of an environment have pretty marginal economics, we would look at those. We have got barrels that have a different oil gas ratio, we would look at that, we look at net backs, logistics and value chain, cash flow, storage cost, future prices, a whole host of things and then as I mentioned earlier the desire to avoid a future need for abrupt shut-ins if we receive logistics and flow curtailed. There are a series of things that we have got a team looking at across the entire basin, and factoring into decisions that we think are prudent decisions from a value standpoint and an operating standpoint. It is a moving target. This is something that our senior leadership team is involved in multiple times a week. The models to do this to understand markets and to stay really in touch with markets, to be sure we are making good decisions continue to be informed by new information and so it is a very dynamic process that we are engaged in right now. On the capital side on the kind of nondiscretionary non our choice capital can Pierre take?
Pierre Breber, CFO
Yes, I think the vast majority are our decisions and choices we are making. But it gets into how you define it. For example, we are choosing to demob the non-critical path project personnel. But clearly that is COVID-related. So I don’t know if you call that a choice. We have a crisis management team that is overseeing supply chains and the whole system. The bottom line is the vast majority of the 30% reduction is being driven by choices that we are making to flex capital, pace capital, defer capital that is largely driven by our decisions to balance cash flow and long-term value.
Biraj Borkhataria, Analyst
Understood. Thanks.
Operator, Operator
Our next question comes from Jason Gabelman from Cowen. Jason, your line is open. You might have your phone on mute. And we are still not hearing you.
Michael Wirth, CEO
Okay, I guess we see. It looks like maybe he’s dropped off. Okay, let’s go to the next question, Jonathan.
Operator, Operator
Certainly. Our next question comes from line Sam Margolin from Wolfe Research.
Sam Margolin, Analyst
So I will ask sort of a focus question. We have gone over a lot of high-level stuff. But because your downstream footprint, I’m pretty good look into Asia. Some other operators have been talking about some interesting observations they have made about the timing disparity between Asia emerging from COVID crisis versus the rest of the world and kind of using it as maybe a soft proxy around the slope that demand might recover or what that might look like on the other side of this. Could you share whatever observations or thoughts you have around what you are seeing?
Michael Wirth, CEO
Yes, Sam, it is a great quote from Asia; it is a figment of the Western imagination. He said it was more of a cultural quote, but it is a big area is the reason I bring that up. What is happening in China is different than what is happening in Indonesia right now. What is happening in South Korea is different than what is happening in Thailand. Broadly speaking, I would say, Asia and other parts of the world, it would appear the demand has found a bottom and that we are kind of bumping along the bottom right now. The biggest hit has been on aviation fuels. You have got gasoline, which is off 50% give or take around most of the world’s diesel, more like 25%. These numbers generally hold in most of the places where we are doing business right now. There are regional signals and signs that things are starting to move. China clearly has come off the bottom. Some other markets in Asia that have seen kind of a second wave and they have reinstituted some of these lockdown-type policies. The green shoots seem to have pulled back a little bit. I would say it is highly specific to the market in Asia where you are. There are certainly signs in several markets of a resumption of activity and resumption of demand growth. They tend to correlate pretty well with when the policies are relaxed and people can begin to get back to work and start to move around again. I think this quarter and perhaps next quarter feel like we are about in the, as I said, bumping along the bottom and going to begin to emerge out of it here at some point over that time.
Sam Margolin, Analyst
Okay. Thank you so much.
Operator, Operator
Our next question comes from line Brian Todd from Siemens Energy. Your question please.
Brian Todd, Analyst
Great. Good morning everybody. Maybe a couple quick ones. The $2 billion of additional CapEx cuts on the fuzzy charts, it looks like it is coming from a kind of spread across all businesses. Any additional color on where the cuts are coming from and in the Permian, I think that the X rate at the end of the year was still the same. So maybe any thoughts and how we think of the trajectory there in the Permian? Then I have a follow-up.
Michael Wirth, CEO
So the two billion. Broadly, you can take about a little bit less than a billion coming out of a major capital project, and that is primarily TCO. We had already factored in a little bit of reduction in TCO in the first reduction down to 16, but not nearly as much as we are seeing now. So call it 800 million or so on major capital projects. About half a billion each on unconventional and on other bass business, and the unconventional would include not only Permian, but also Argentina and Canada. About another 200 million coming out of downstream and chemicals. I think if you take those and wrap them up, that gets you to the two billion. On the Permian, our guidance still is that will exit the year at roughly the level that we came in; we are 125,000 barrels lower than what we had initially indicated if you were to look at the chart we use at the Investor Day meeting. Notwithstanding the fact that we are seeing some curtailments there and we are pulling back on the rigs, the momentum coming into the year has been strong in Permian production growth in the first quarter, which largely reflects wells that were put on production last year, and we had more pops in the second half of the year than we did in the first half of the year. First quarter Permian production was strong and so that will kick out here over the middle part of the year and come back off as the effects of the capital reductions and curtailments roll through the system, but our expectation is that we will exit roughly where we entered, which is about 125,000 less than numbers we showed you in early March.
Brian Todd, Analyst
Right. Maybe one. I know there is a huge amount of uncertainty right now, but maybe thought that implications as we think of the recovery coming out of this and in a very specific sense on curtailments. What is the signal? Is it clearly just a net back price that will drive the resumption of those volumes, at least on the ones that you operate and control? As we think about the budget, as we move out of the current level of spend and you start to work your way back towards maybe the $20 billion level that we were in before, I mean, how do you what are the sort of signals that you see that will allow you to turn on curtailed volumes and then allow you to put rigs back to work in the Permian?
Michael Wirth, CEO
Yes. So, on the first one on curtailments, it is either going to be market signals or on the economic value of those barrels and net backs will be an important part of that. We will also, because we can pull some of these things through the value chain into markets we can; what do export markets look like, what are we have got a refinery that we pull some of our permanent production into. Refining margins in the value chain opportunities will play into our thinking there as well. We look at these things across the entire value chain, but it’ll be an economic signal that says these barrels are being called for by the market and contribution is more positive. In terms of the capital spending, those are longer cycle decisions than curtailments. You can expect us to be thoughtful and not rush capital back into the market prematurely, but it will be our view on where markets are headed. So, curtailments are kind of more or less where markets are or where they are likely to be in the short term. Capital spending is more of a medium-term view, and it is because this is a flexible asset class, we don’t need to look at the long-term signal; we always factor that in. The medium term is given the production profile on each individual unconventional; we will be looking at signals that suggest that that is strengthening and that the demand is there. You are going to watch OPEC, you are going to watch inventories; there is a whole series of indicators that will help us inform decision making.
Pierre Breber, CFO
Thanks, Brian.
Brian Todd, Analyst
Thank you.
Pierre Breber, CFO
With that, I would like to thank everyone for your time today. We do apologize for some technical and audio challenges; rest assured the transcript will certainly be posted shortly after the call today.
Michael Wirth, CEO
Yes, I appreciate your patience and I apologize for the technical difficulties. I’m not sure what happened, but not only will the transcript be posted, but this will be investigated and corrected.
Pierre Breber, CFO
Please stay safe and healthy. Jonathan, back to you.
Operator, Operator
Thank you. Ladies and gentlemen, this concludes Chevron’s first quarter earnings conference call. You may now disconnect.