Earnings Call Transcript - CVX Q1 2022

Operator, Operator

Good morning. My name is Katie, and I will be your conference facilitator today. Welcome to Chevron's First Quarter 2022 Earnings Conference Call. 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. Roderick Green. Please go ahead.

Roderick Green, General Manager of Investor Relations

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

Michael Wirth, CEO

All right. Thanks, Roderick. Before we turn to first quarter results, I'd like to recognize the people of Ukraine. Our hearts go out to those affected by this tragedy, and we hope for a prompt and enduring diplomatic resolution. The last two years have been volatile and unpredictable, driven by the global pandemic and geopolitical conflict, creating strains on economies and markets around the world. Through it all, our objectives have been clear and consistent. And in the first quarter, we continued to make progress, delivering book returns in the mid-teens, investing to grow both our traditional and New Energy businesses, and returning even more cash to shareholders while maintaining an industry-leading balance sheet. Recent events remind us of the importance of energy. Looking forward, I know that Chevron is doing its part, raising this year's Permian production outlook and advancing two important renewable fuel transactions: our Bunge joint venture, which is expected to close shortly; and the Renewable Energy Group acquisition, which is expected to close around midyear. While the future is uncertain, our actions are not. We're on a path to delivering higher returns and lower carbon while rewarding our stakeholders all along the way. With that, I'll turn it over to Pierre to discuss our financials.

Pierre Breber, CFO

Thanks, Mike. We reported first quarter earnings of $6.3 billion or $3.22 per share. Adjusted earnings were $6.5 billion or $3.36 per share. Included in the current quarter were pension settlement costs totaling $66 million and negative foreign currency effects exceeding $200 million. A reconciliation of non-GAAP measures can be found in the appendix of this presentation. Adjusted ROCE was over 15% and our net debt ratio is below 11%. A third consecutive quarter with free cash flow over $6 billion enabled us to return $4 billion to shareholders and further pay down debt. In addition, during the quarter, we received over $4 billion in cash, with about 3,000 current and former employees exercising stock options. This quarter's proceeds from option exercises were over four times the historical annual average of around $1 billion per year. About two-thirds of the vesting options at year-end 2021 were exercised during the first quarter, lowering the potential future rate of dilution from the outstanding balance. Over time, we expect our share buybacks to more than offset the first quarter dilutive effect. Adjusted first quarter earnings were up $4.8 billion versus last quarter and the last year. Adjusted upstream earnings increased mainly on higher realizations while adjusted downstream earnings increased primarily on higher margins, partially offset by negative timing effects. Compared with last quarter, adjusted earnings were up more than $1.6 billion. Adjusted upstream earnings increased primarily on higher realizations and the absence of certain fourth quarter DD&A charges. Liftings were lower in part due to lower production in the Gulf of Mexico. Adjusted downstream earnings decreased primarily on timing effects. The All Other segment was down primarily on unfavorable tax items and higher corporate charges. The All Other segment results can vary between quarters, and our full year guidance is unchanged. First quarter oil equivalent production decreased 2% year-on-year due to the expiration of Rokan in Indonesia, lower production in Thailand as we approach the end of the concession, and lower entitlements due to higher prices. Permian growth in the absence of Winter Storm Uri impacts partially offset and drove U.S. oil and gas production up over 10%. Now looking ahead. In the second quarter, we expect lower production due to planned turnarounds at Wheatstone and Angola LNG, impacts from CPC pipeline and the expiration of the Area 1 concession in Thailand. At CPC, two of the three single port moorings are now back in service and TCO has returned to full operations. Downtime associated with the April repairs is estimated to be less than 15% of our second quarter turnaround and downtime guidance. We anticipate a return of capital between $250 million and $350 million from Angola LNG in the second quarter. This cash is reported through cash from investing and not cash from operations. In the first quarter, Angola LNG returned over $500 million of capital. The differences between affiliate earnings and dividends are not ratable and TCO has not yet declared a dividend in 2022. With higher commodity prices, affiliate dividends are expected to be $1 billion higher than our previous guidance. We've utilized our NOLs and other U.S. tax attributes and expect to make estimated U.S. federal and state income tax payments in the second quarter. These payments will flow through working capital accounts, just like our first quarter IRS refund. In the second quarter, we expect to invest $600 million as we close the Bunge joint venture and to repurchase shares at the top of our guidance range. With that, I'll turn it back to Roderick.

Roderick Green, General Manager of Investor Relations

That concludes our prepared remarks. We're now ready to take your questions. Katie, please open the lines.

Operator, Operator

Our first question comes from Phil Gresh with JPMorgan.

Philip Gresh, Analyst

Mike, I want to start with one for you on Tengiz. There have been a number of events here in the quarter from the social unrest earlier in the quarter to the CPC pipeline uncertainty and the moorings issues. So I recognize production seems to be back up and running to normal now. But I'm curious how you think about this in terms of the broader implications of what has been happening on the ground there and it's a very important asset for Chevron. So what are your latest thoughts?

Michael Wirth, CEO

Well, Phil, it's an important asset, not just to our company but to the Republic of Kazakhstan and, frankly, to world energy markets in Europe, in particular. It's a significant supplier at a time when there are concerns about supply security that you're very familiar with. So we're focused on safe and reliable operations, as you would expect, protecting people and the environment and our assets, executing the major project that's underway, and working with all the stakeholders involved in this, including partners, the government of Kazakhstan, and our customers. The risks that I think you're referring to are present in Kazakhstan and, in varying degrees, in other parts of the world as well. That's part of what we do: manage those risks on the ground each and every day. There are times when the environment feels a bit more benign, but you can't take your eyes off those risks because they can materialize at any point. To this point in time, we've been able to make good progress on the project, with some impact really from the weather-related downtime at the loading buoys and lower assist. But two of those are back in service, and the third one is slated for repair, which gives us plenty of redundant capacity there. So we continue to stay very focused on every aspect of managing that, and our people on the ground are empowered to do what it takes to be very responsive in real time. And I'm incredibly proud of the work that they've done in a very challenging environment.

Philip Gresh, Analyst

Understood. I appreciate your thoughts. My second question would be for Pierre on cash flows or cash balances. The quarter did come in a bit lower than expected on cash flows, and I think you highlighted some timing factors. But you did get a bunch of cash from the stock vesting. So cash balances are up quite significantly. So I was wondering if there's anything else to highlight on the moving pieces of the cash flow. But even at strip prices with your buybacks, it seems like cash balances will keep going up. So just what are your latest thoughts on managing the cash from here? Thanks.

Pierre Breber, CFO

Thanks, Phil. First, let me just talk about cash in the quarter. Cash in the quarter was very strong. As I pointed out, our dividends from affiliates are not ratable. Particularly from TCO, which historically has paid dividends in the fourth quarter, we increased our guidance on expected dividends, but they were light in the first quarter. So yes, that's timing. I also pointed out that Angola LNG returned $500 million of capital. That's essentially operating cash. That's a function of operating an LNG facility and selling it into the European gas markets at TTF prices. However, adjusted to the accounting rules, it's flowing through cash from investing and not cash from operations. But for all intents and purposes, it is operating cash flow. At some point in time in the future, it might revert back to that depending on the retained earnings in that affiliate. Another item I did not mention is that it's a typical item that happens in the first quarter. We pay out our long-term incentive compensation, a portion of that is in the form of restricted stock and performance shares. That happens annually, but with a higher stock price, that was a higher payment than in previous years. That does not flow through working capital. That comes out of a long-term liability account. As I mentioned, we expect to make estimated tax payments next quarter, but that will flow through working capital in many of analysts look at our cash flow ex working capital. Our IRS refund also went through working capital that we had guided to in the first quarter. In terms of our cash balances, we're running a little bit high on our cash balance. That's why we refer to net debt, but we have a couple of cash items coming up. We expect to close REG around midyear. That's $3 billion. We have an offering up right now to do a make-whole call on about $3 billion of bonds. These are bonds that are economic to call back. On the buybacks, we increased our buyback guidance at our Investor Day back in March to $5 billion to $10 billion. We were at a $5 billion rate here in the first quarter. We're doubling it now to the top of the range of $10 billion, and we'll just see where the environment goes from here. We are setting the buyback at a rate that we can maintain across the commodity cycle. We could have a higher buyback rate this quarter or next quarter, but the goal is not to maximize the buyback rate in any individual quarter. It's to set it at a level that we can maintain when the cycle turns. Therefore, we can rebalance our net debt ratio closer to our mid-cycle guidance.

Devin McDermott, Analyst

So the first one I wanted to ask is just on the Permian results and guidance increase. I was wondering if you could talk through in a bit more detail some of the drivers there. Are you adding activity? Is it better performance on the activity you had already budgeted for? Is it non-operated? Just walk through some of the drivers there and how you're thinking about that.

Michael Wirth, CEO

Yes, Devin, we did have a strong first quarter, and a couple of big things to bear in mind there. As we slowed things down in 2020 when demand contracted due to the pandemic, we ended up with an inventory of drilled but uncompleted wells that grew beyond what would be considered a normal run rate for our rig fleet. We’ve been working through that and we're back down now to what you could think of as a more normal factory model. We always want to have docks out in front of the completion crews, but that had grown to a larger than normal rate. As we've caught that up, that's pretty efficient. It's the first place you turn as you see the cycle turn, completing those wells to get that production online. We'll be moving into more of a factory model, so it will level out a little bit versus what might feel like a surge. We also get some non-ratable joint venture bookings that show up. Both of those contributed to a very strong first quarter. By the time you look at how that would roll through in continued activity for the rest of this year, it's pretty clear that we'll end up higher than the initial guidance we had put out. However, we haven't stepped up our program, the number of rigs, or spending. It's all really a function of getting the machine running again alongside ongoing efficiency improvements that we continue to see.

Devin McDermott, Analyst

Got it. That's very helpful. Thanks. And my second question is on your global gas and LNG portfolio. I was wondering if you could just give us an update on how you're looking at some of the medium and longer-term opportunities there given what's going on in markets. Specifically, I'm thinking about Eastern Med and that gas position. And then also whether or not integration into some type of LNG facility in the U.S. might make sense for some of your production growth there as well?

Michael Wirth, CEO

Sure. LNG is on everybody's mind these days. It's important for meeting Europe's needs and for delivering a lower carbon energy system globally. We see a strong market here in the near term. Eastern Med is a wonderful asset. I visited the Leviathan platform two weeks ago, where we spent a lot of time with our people in the business. They've recently completed a project to increase infrastructure access to regional markets and are flowing more gas into Egypt as a result. We're looking at several opportunities to further increase production because the resource there is quite prolific. That includes further coal-to-gas switching in Israel for regional supply into neighboring countries, potential power generation, and floating LNG, potentially using oilage and other LNG facilities in the region—a number of different commercial options that are being evaluated and worked. So more to come as those mature, but it's a priority for us given the market demand. Regarding the U.S., we have a lot of gas production here that largely prices at Henry Hub today, and there are projects in the process for LNG export facilities. We've discussed briefly with several developers, but nothing more to say at this point. That's part of our LNG portfolio we've been very focused on historically in the Pacific Basin. As the Atlantic Basin markets look different now, it may make sense for us to explore some U.S. supply as well. So we'll advise you as we advance anything further.

Neil Mehta, Analyst

Mike, I just love your perspective on the oil macro. You always have a good read on it. It strikes us that inventories for product and oil are very tight right now. You've got jet fuel recovering over the summer. We'll see what happens in China. Shale has an inelastic supply response. So how does this ultimately resolve itself in the near term? Do you ultimately need to see demand destruction through crack or flat price of oil? Or is there something that we're missing?

Michael Wirth, CEO

No, Neil. You're putting your finger on all the levers. If you step back, supply always responds more slowly than demand does. In normal times, which we have not been in for the last couple of years, both move gradually in relative sympathy. Storage can buffer any near-term imbalances. In 2020, we saw a contraction that was unprecedented. The entire industry responded—every segment of the industry had to. Coming out of the pandemic, demand growth has surged, and we haven’t seen it all come back yet. Air travel, particularly international travel, has not fully recovered to pre-pandemic levels. Meanwhile, demand is responding more quickly than supply can match it, compounded by various issues like the independent E&Ps feeling an obligation to return cash to shareholders, and many integrated companies prioritizing new energy over oil and gas production. The market is not stable and inventories are low. While tension remains in markets with potential price increases impacting the economy, the supply response is coming. We are up 10% in the U.S. year-on-year, with ongoing projects in Kazakhstan to start soon. But the response comes at a different pace than demand growth and the current uncertainty is not likely to resolve in the near term.

Neil Mehta, Analyst

It's a great perspective, Mike. Another big-picture question is, if you think about 20 years ago at the beginning of the last super cycle, you had very similar, very large multiple arbitrages between the super majors and even large independents and some of the majors. And one could look at your multiple on consensus and say you trade at a premium relative to a lot of the global majors. Do you think there's value in mega M&A in the space? And do you see yourself as a logical consolidator, given that M&A is such a core competency and it worked out incredibly well for you 20 years ago with Texaco?

Michael Wirth, CEO

Yes. We're always looking at these things, Neil. History suggests that deals done in an upcycle or near the top of the cycle don't always look as good in hindsight as those done in different parts of the cycle. When looking back 20 years ago, consolidation made sense coming out of low prices. The industry is more efficient today, and while there might be synergy opportunities, they may not hold the same magnitude. I never rule anything out, but just because we’re trading at a relatively strong multiple doesn't mean it implies we should pursue a deal. We prioritize a disciplined approach.

Jeanine Wai, Analyst

Our first question, maybe we just hit back on cash returns. The buyback for 2Q annualized again is at the top of your range. And Pierre, I think you reiterated on Phil's question that buybacks are intended to be through the cycle. Can you just provide a bit of commentary on how you're viewing the buyback in relation to mid-cycle cash flow?

Pierre Breber, CFO

Thanks, Jeanine. The buyback rate of $10 billion is a company record, the previous highest buyback rate was back in 2008. As you say, we want to maintain it across the commodity cycle, so we're very much in tune with our mid-cycle cash flow capabilities. We showed at our Investor Day low case scenarios demonstrating that we could maintain the buyback for multiple years even under $50 Brent prices, which is around breakeven for covering both our dividend and capital. Given the current strength, our buybacks could be higher than $10 billion, demonstrating our commitment to sustaining our capital-efficient model and rewarding shareholders.

Michael Wirth, CEO

Yes, Jeanine, I'm glad you talked about long-term plans because we've had a long-term Permian plan. Our production profile looks consistent despite the volatile period. As we secure equipment and services, we're ensuring gas takeaway capabilities that drive our operations forward, ensuring our growth in the Permian is sustainable and supported by reliable infrastructure.

Paul Cheng, Analyst

Two questions, please. First on inflation. Pierre, just curious, for your CapEx for the next 2 or 3 years, do you have a percentage to share on what percent is in fixed price contracts and what percent is vulnerable to inflation? And regarding the Bunge JV $600 million investment, is that included in your original budget, or is it in addition?

Pierre Breber, CFO

I'll start. The Bunge joint venture, anything that is an acquisition is not included in our $15.3 billion budget we shared back in December. It has been cited in our press release that Bunge would be an addition. Regarding cost inflation, we are experiencing manageable cost pressures in the Permian. Outside the U.S., we see modest increases. This does not change our $15.3 billion CapEx budget. About 80% of that is outside the U.S., which is not seeing much cost pressure. The Permian occupies 20% of our capital budget, and while we plan our business accordingly, we have seen some escalations that we can offset with efficiencies.

Michael Wirth, CEO

Yes, Paul, regarding host government discussions, we're early in this price upcycle. The dynamics have yet to change significantly as governments adjust to the current environment. We approach each opportunity looking for value creation for both the company and the host country. We've seen success in concessions in Angola, stemming from a long partnership built over decades, and we aim to maintain this collaborative approach.

Roger Read, Analyst

Yes. If we could maybe talk a bit about some of the bigger projects, especially with ongoing uncertainty. I know you have projects in the Gulf of Mexico and an extensive LNG footprint globally. How do you think blending deepwater projects with new LNG opportunities will evolve over the next couple of years?

Michael Wirth, CEO

Yes. In the Gulf of Mexico, we have a nice set of development projects underway. We're seeing significant positive developments with Jack/St. Malo, Big Foot, Mad Dog 2, and more. These projects are properly spaced and not all in the same development phase, allowing us to manage execution effectively. Importantly, they have low carbon intensity and will play a vital role in our portfolio. Regarding LNG, we have several opportunities in the Eastern Mediterranean and discussions underway with potential partners in the U.S. We continue to evaluate our position within the LNG market and remain committed to maintaining capital discipline.

Ryan Todd, Analyst

Maybe a follow-up on LNG. The last couple of quarters have been impacted by various LNG volumes offline. I know you've got a statement in the second quarter regarding this. Can you give us clarity on potential volume impacts and disruptions across your LNG operations?

Michael Wirth, CEO

In the first quarter, we had a little setback at Gorgon due to proactive asset integrity work. Wheatstone is currently undergoing turnaround on one of its two trains but we expect to resume production very soon. Additionally, we have planned turnarounds at Angola LNG in the future. These activities will affect production but we’re managing timelines effectively.

Manav Gupta, Analyst

My first question is a quick clarification. You indicated there was a storm at CPC, and I believe it occurred in late March. How long were the facilities down and how should we model production impact from this storm?

Michael Wirth, CEO

Yes, you are correct, Manav. The impact was mostly felt in April, and the effect is incorporated into our guidance for second quarter production.

Manav Gupta, Analyst

Perfect. At your energy transition day, you had provided certain targets for growing your renewable fuel franchise, and REG gets you a long way when it comes to renewable diesel. Another area you were generally bullish on was sustainable aviation fuel. Can you help us understand how Chevron plans to build on its sustainable aviation fuel business?

Michael Wirth, CEO

Sustainable aviation fuel demand is projected to grow. Aviation fuels are tough to decarbonize, but we produce some at our El Segundo facility. We’re also exploring alternative pathways and partnerships to develop this sector, though quality control and cost competitiveness remain challenges. Policy incentives may be needed to boost production and development in this space.

Doug Leggate, Analyst

Mike, could you provide some perspective on realizations and insurance rates? Is there a potential durable discount on the Tengiz value, and if so, what’s the timeline to address this?

Michael Wirth, CEO

Pre-invasion, CPC discounts were around $1 or so to dated Brent. Post-invasion, the range has shifted to around $4 to $10, which reflects additional costs related to insurance and freight. These changes depend heavily on the resolution in Ukraine, as the risk perceptions from lifting there will dictate future market conditions.

Doug Leggate, Analyst

That's a tough question, but thanks for the input. I also want to approach the M&A subject differently given your credentials. With the balance sheet in excellent shape, are there strategic opportunities you would pursue? What gaps do you see that you would want to fill?

Michael Wirth, CEO

Thanks for the acknowledgment. We like our portfolio and have a 10-year outlook indicating we've captured significant resources. We could increase our gas exposure over time, and we believe in expanding our renewable fuels and petrochemical capabilities. While we're focused on growing existing assets, any future opportunities have to be well-aligned with our long-term strategy and disciplined investment approach. We're patient and selective; we don't feel pressured to act immediately.

Roderick Green, General Manager of Investor Relations

Thank you. I'd like to thank everyone for your time today. We appreciate your interest in Chevron and everyone's participation on the call. Please stay safe and healthy. Katie, back to you.

Operator, Operator

Thank you. This concludes Chevron's First Quarter 2022 Earnings Conference Call. You may now disconnect.