Chevron

Oil & Gas

Chevron reported one of its most profitable quarters ever even though their overall oil production had decreased

Chevron’s CFO celebrated that the company had one of its best quarters since 2008, over $5 billion more than the previous quarter, “primarily on higher refining margins.” “Pierre Breber — Chief Financial Officer: Thank you, Roderick, and thanks, everyone, for joining us today. We delivered another strong quarter, another quarter of strong financial results with ROCE over 25%, the highest since 2008. Special items this quarter include asset sale gains of $200 million and a $600 million charge to terminate early a long-term LNG regas contract at Sabine Pass. C&E for the quarter was nearly $4 billion, including inorganic spend to form our JV with Bunge. With the acquisition of REG, our total investment was $6.8 billion, more than double last year’s quarter. Strong cash flow enabled us to fund this higher level of investment, pay down debt for the fifth consecutive quarter, and returned more than $5 billion to our shareholders through dividends and buybacks. Adjusted second quarter earnings were up more than $8 billion versus last year. Adjusted upstream earnings increased mainly on higher realizations partially offset by lower liftings from the end of concessions and Indonesia and Thailand. Adjusted downstream earnings increased primarily on higher refining margins. Compared with last quarter, adjusted earnings were up nearly $5 billion. Adjusted upstream earnings increased primarily on higher realizations, partially offset by tax and other items, including higher withholding taxes on TCO dividends and cash repatriations. Adjusted downstream earnings increased primarily on higher refining margins and a favorable swing in timing effects.” (Chevron Q2 2022 Earnings Call, 7/29/2022)

Despite the massive increase in profits, Chevron said their oil production actually decreased by about 7%. “Jay Johnson — Executive Vice President, Upstream: Thanks, Pierre. Second quarter oil equivalent production decreased about 7% year on year due to expiration of our contracts in both Indonesia and Thailand, the sale of our Eagle Ford asset, and CPC curtailments impacting TCO during April. This was partially offset by shale and tight growth, primarily in the Permian. In the Permian, we’re delivering on our objectives of higher returns and lower carbon.” (Chevron Q2 2022 Earnings Call, 7/29/2022)

Chevron described their engagement with the White House as “constructive and productive,” saying US based production was up up 7%. “Pierre Breber — Chief Financial Officer: Manav, we won’t comment on the specifics of our engagements. I think you’re right that we’re — it’s constructive and productive. I’ll point out our U.S. oil and gas production in the first half of the year was up 7% versus last year. Our U.S. refined product sales up 10% versus last year. The administration wants energy supplies to increase, we’re doing that. Our investment globally, up 80% first half of the year. If you look at the U.S., more than double when you include REG. So Chevron is growing energy supply, increasing investment, and we’re engaging constructively with Congress and this administration. Thanks, Manav.” (Chevron Q2 2022 Earnings Call, 7/29/2022)

Chevron told analysts it was now planning to increase stock buybacks to $15 billion per year

Chevron announced it was increasing their stock buybacks guidance to $15 billion for the year. “Pierre Breber — Chief Financial Officer: In downstream, planned turnarounds are primarily at our California refineries. We do not expect significant dividends from TCO or Angola LNG until the fourth quarter. Our full year guidance for affiliate dividends is unchanged, with upside potential beyond the top of the range depending on commodity prices. Also, we increased the top end of our share buyback guidance range to $15 billion per year and expect to be at that rate during the third quarter.” (Chevron Q2 2022 Earnings Call, 7/29/2022)

Chevron’s CFO emphasized their share buyback guidance was $15 billion per year and “ we intend to maintain buybacks at this annual rate for a number of years across the commodity cycle”“Pierre Breber — Chief Financial Officer: And as you said, we just increased the guidance to — we just increased the top of the range of our guidance to $15 billion a year. That represents about 1% of our shares each quarter. The $15 billion annual rate is based on our current outlook. It was tested against a number of scenarios. The rate is consistent with our Investor Day upside leverage case, which was a $75 (Inaudible) flat nominal price over five years. As we’ve said with previous buyback rates, we intend to maintain buybacks at this annual rate for a number of years across the commodity cycle. As a reminder, our net debt is well below our mid-cycle guidance range. So we’ll continue buybacks even when the commodity cycle turns down and we’ll lever back up our balance sheet closer to that 20% to 25% guidance range.” (Chevron Q2 2022 Earnings Call, 7/29/2022)

Chevron’s CFO: “The first financial priority is to grow the dividend. We’ve done that for 35 consecutive years, increased it 6% earlier this year. It’s up 20% since right before COVID, and it’s doubled since 2010.”“Pierre Breber — Chief Financial Officer: Thanks, Neil. It’s Pierre. I’ll take that. I’ll go through our financial priorities. They’ve been consistent for decades, literally. The first financial priority is to grow the dividend. We’ve done that for 35 consecutive years, increased it 6% earlier this year. It’s up 20% since right before COVID, and it’s doubled since 2010. The second is to invest and grow both traditional and new energy, and you saw that our total investments first half of the year were up 80% versus a year ago. The third is to maintain a strong balance sheet. For the fifth consecutive quarter, we paid down debt. Our net debt ratio is at 8%.” (Chevron Q2 2022 Earnings Call, 7/29/2022)

Chevron emphasized it was not seeking to increase production significantly, but was “focused on generating returns”

Chevron told analysts the company “has been to be very disciplined, very focused on generating the returns and the efficiency that allow us to be profitable regardless of the prices. And so we’re not responding to short-term price.” “Jay Johnson — Executive Vice President, Upstream: Yep. I’ll start out with that and then Pierre can finish if he’s got any other thoughts. The Permian — our approach to the Permian, as you know, for many years, has been to be very disciplined, very focused on generating the returns and the efficiency that allow us to be profitable regardless of the prices. And so we’re not responding to short-term price, but we are increasing our activity levels since the turn down during COVID. And so we have seen our investment go up. This year, it’s $1 billion higher than it was last year. (Chevron Q2 2022 Earnings Call, 7/29/2022)

Chevron said it was expecting a 15% increase in Permian oil production and “then I would expect to see it relatively flat after that as we just maintain an efficient operation across the Permian.” “Jay Johnson — Executive Vice President, Upstream: And we also see the number of wells that we’re putting on production going up, we expect to do over 200 (Inaudible) this year. And so we’re looking for about a 15% increase in our Permian production. And then I would expect to see it relatively flat after that as we just maintain an efficient operation across the Permian. We also have non-operated activity, and we currently have about 9 net rigs running on the non-op side. And so that also contributes significantly to our production profile. Our guidance remains unchanged. We’d expect to see about 1.2 million to 1.5 million barrels a day of production ultimately as our plateau. But as we continue to gain insights and knowledge and as we look at our efficiencies, as we look at our portfolio and world demand, that can change as we go forward. That’s our guidance as we see it today, and we’ll continue to update you as we move forward in time.” (Chevron Q2 2022 Earnings Call, 7/29/2022)

Chevron’s EVP: “ think we’ve accomplished a mindset shift in Chevron, and this is throughout our workforce, being very focused on returns, not chasing a production target, but continuing to run this as a business and thinking about the returns we can get.” “Jay Johnson — Executive Vice President, Upstream: Thanks for the question, and it’s pretty exciting. I mean the one bad thing about retirement is you don’t get to be part of the next steps, and I’m excited about them. I would start by just saying, I think we’ve accomplished a mindset shift in Chevron, and this is throughout our workforce, being very focused on returns, not chasing a production target, but continuing to run this as a business and thinking about the returns we can get. Scale is important, but it’s an outcome of the opportunity set that we have and the investments and capital that we choose to invest. (Chevron Q2 2022 Earnings Call, 7/29/2022)

Chevron downplayed inflation and recession costs, saying the company was focused on “more free cash flow for shareholders”

Chevron’s EVP said the company was less affected by inflation thanks to multi year contracts and years of infrastructure investment. “Jay Johnson — Executive Vice President, Upstream: It’s difficult for me to really do that definitively. What I can say, though, is I think we have a competitive advantage in the Permian. We have a couple of things working in our favor. We maintain a global supply chain and we’re able to tap suppliers of both equipment and materials, goods, and services over a much broader range than maybe some of our competitors. We also do multiyear contracts and other mechanisms commercially that allow us to mitigate some of the inflationary pressures that we see today. And then, of course, our focus on driving for improved productivity, improved efficiency has really helped us continue to counter the inflationary pressures. I think the other area that we have a distinct advantage is we’ve been building out our infrastructure in the Permian. And so just as a proof point, the last 800 wells over the last five years, to produce those 800 wells, we had to build 40 central tank batteries. As we look forward, the next 800 wells, we only need to build an additional four central tank batteries. So while others are having to invest in this high inflationary period, we’re largely using infrastructure that was built over the past five years with very small incremental surface facilities required. And I think that’s going to be hard for others to match.” (Chevron Q2 2022 Earnings Call, 7/29/2022)

Chevron’s CFO said the company had “seen cost inflation this year in the single digits,” with lower inflation outside of the US. “Pierre Breber — Chief Financial Officer: Thanks, Paul. I’ll take the first, and then I’ll hand it to Jay on the second. On the onshore U.S., we’ve seen cost inflation this year in the single digits. We’ve been able to mitigate a part of that through good planning, smart procurement, and good relationships with suppliers. And as Jay pointed out, we’ve been able to also get more efficient with our drilling and completion operations, which also partially offsets it. Outside of the U.S., we’re seeing much more modest inflation, and we talked about our Gulf of Mexico offshore rigs, which are contracted at a time when the rig rates were lower. As we’re looking toward 2023, we’re doing that work right now. We’re confident that we’ll be able to secure all the goods and services that were needed for our program.” (Chevron Q2 2022 Earnings Call, 7/29/2022)

Chevron downplayed recession predictions, saying that demand was “more recession resilient going forward.” “Pierre Breber — Chief Financial Officer: I mean what’s interesting is there’s obviously concerns around the recession. In terms of tailwinds, we still have very low unemployment, and we have a consumer that wants to spend money to go out and do things they haven’t been able to do for a couple of years. When prices were higher in the second quarter, they made some choices. And if you look at that demand response on gasoline, that’s in line or even higher than some past recession. So it’s not clear. I guess what I’d say is demand, I think, will be much more recession resilient going forward just because we’ve seen a little bit of that response in the second quarter. And again, diesel will be tied to underlying commercial activity.” (Chevron Q2 2022 Earnings Call, 7/29/2022)

Chevron’s CFO: “our upstream business is much more capital efficient than it’s ever been. And has a mindset of how do we deliver business results with less capital. And if we do that, there’s more free cash flow for shareholders.”“Pierre Breber — Chief Financial Officer: And of course, all the activities we’re doing to grow new energies. We can do all of that within the guidance. And as we recognize, Jay, one of the things he deserves a lot of credit for is our upstream business is much more capital efficient than it’s ever been. And has a mindset of how do we deliver business results with less capital. And if we do that, there’s more free cash flow for shareholders.” (Chevron Q2 2022 Earnings Call, 7/29/2022)

Chevron’s CEO told analysts the company had cut back on capital spending in favor of share buybacks and expanded dividends

Chevron’s CEO touted a “higher dividend,” share buybacks, and a “a disciplined capital program, well below budget” as their 2021 financial priorities. “Mike Wirth — Chairman and Chief Executive Officer: Chevron is an even better company today than we were just a few years ago. We’re showing it through our actions and our performance, which we expect to drive higher returns and lower carbon. And we intend to keep getting better. Our record free cash flow enabled us to strongly address all four of our financial priorities in 2021: a higher dividend for the 34th consecutive year; a disciplined capital program, well below budget; significant debt paydown with a year-end net debt ratio comfortably below 20% and another year of share buybacks, our 14th out of the past 18 years.” (Chevron Q4 2021 Earnings Call, 1/28/2022)

Chevron’s CEO bragged “In just two years, capex was reduced by almost half from Chevron and Noble’s pre-COVID total.” “Mike Wirth — Chairman and Chief Executive Officer: I expect 2022 will be even better for cash returns to shareholders with another dividend increase announced this week and first quarter buybacks projected at the top of our guidance range. We’re optimistic about the future, focused on continuing to reward our shareholders while investing to grow our businesses and maintaining a strong balance sheet. We made the most of this challenging period, transforming Chevron through a well-timed acquisition and an enterprise-wide restructuring into a leaner and more productive company. In just two years, capex was reduced by almost half from Chevron and Noble’s pre-COVID total.” (Chevron Q4 2021 Earnings Call, 1/28/2022)

Chevron’s CEO said the company had gone through a “structural downshift” in capital spending: ”Our production guidance has not changed. And so what we have is a portfolio… which allows us to return more capital to shareholders.“Mike Wirth — Chairman and Chief Executive Officer: Yes. It’s the capital efficiency is the big driver, Alastair. So you’re right. The commodity price environments in those two years are pretty similar. Cash from ops, pretty similar, although there can be some moving parts in there that are not necessarily just commodity price. But we have capital spend that is significantly down from that period of time, which means free cash flow is significantly higher. And our belief going forward, our capital guidance going forward is $15 billion to $17 billion for the next five years. It has come down from $19 billion to $22 billion pre-COVID. So that’s a structural downshift. Our production guidance has not changed. And so what we have is a portfolio that is generating free cash flow and future cash flows in a much more capital-efficient manner which allows us to return more capital to shareholders. So that’s the simple story.” (Chevron Q4 2021 Earnings Call, 1/28/2022)

Chevron’s CEO: “the last two quarters have been the best two quarters the company has ever seen. And last year was 25% higher than the best year in our history. So we increased the dividend.” “Mike Wirth — Chairman and Chief Executive Officer: Yes. We will talk about that more in March, Phil. But our longer-term view on the pricing environment hasn’t changed a lot. There’s a lot of resource out there that can be produced economically at prices lower than what we see today. And our breakeven reflects that. And so we are in a period of time here where cash flow is strong. As we mentioned in our comments, the last two quarters have been the best two quarters the company has ever seen. And last year was 25% higher than the best year in our history. So we increased the dividend. Debt came down significantly. And we’ve guided to the high end of our share repurchase range. If we continue to see an environment like this, the balance sheet doesn’t need to be a lot stronger than it is today. And we’ve already increased the dividend and we’re going to be disciplined on capital. And so that really leaves one lever left. And I think over time, you should expect us to be consistent with our history, which is returning cash through share repurchases. And at least in an environment like this, we’ve got ample cash to do that and sustain that well into any kind of a correction that we eventually will see. (Chevron Q4 2021 Earnings Call, 1/28/2022)

Chevron’s CEO said “we pulled the handbrake pretty hard in 2020, we throttled a lot of things down” and that it would take time to adjust.“Mike Wirth — Chairman and Chief Executive Officer: And on 2021, Devin, there’s nothing noteworthy in the profile of capex and what it was that drove the ultimate outcome, which was a little below what we had guided to. There’s a lot of inertia in some of these things. And as we pulled the handbrake pretty hard in 2020, we throttled a lot of things down. And as we start to bottom out and turn that back around a little bit as we will in 2022, this system just needs to adjust to that. And so I wouldn’t call out anything there that’s unique or especially noteworthy. (Chevron Q4 2021 Earnings Call, 1/28/2022)

Chevron’s CEO said high prices would not lead them to raise production

Chevron’s CEO: “we’re not going to get out ahead of ourselves chasing anything as we bring activity back up… I don’t think we’re going to be tempted by the price of the day to put that at risk by doing more.” “Mike Wirth — Chairman and Chief Executive Officer: In theory, the answer to that five years ago was yes. The answer to that today is yes. We’ve been very focused on execution efficiency and returns. And as I said, we laid out in March of last year a profile that showed strong production growth, long plateau, strong returns and capital efficiency. We’ll update that again here in the new year at March. But this is an asset that just continues to look as good as we’ve portrayed it to you, and we’re not going to get out ahead of ourselves chasing anything as we bring activity back up from $2 billion last year to $3 billion. That’s a 50% increase in capital spend. I mentioned that we’re going to see a 50% increase in wells put on production in ’22 versus ’21. That is a meaningful step-up in activity, and we want to execute that well. And so I don’t think we’re going to be tempted by the price of the day to put that at risk by doing more. And I think Pierre already addressed inflation. I don’t know, Pierre, if there’s anything else you’d like to say on either of those topics. (Chevron Q4 2021 Earnings Call, 1/28/2022)

When pressed on whether Chevron would invest more in production, the CEO demurred: “we intend to stay within that range as we’ve guided.” “Mike Wirth — Chairman and Chief Executive Officer: And on longer-term capex, if I caught your question, Jason. Look, we give this range of $15 billion to $17 billion we’ve put out there. We’re at the low end of the range this year. Now that’s a 30% step-up from where we finished 2021. And as I mentioned earlier, in a place like the Permian, it’s a 50% step-up. So it’s not a trivial change, but it’s still a very disciplined approach to that business. And we intend to stay within that range as we’ve guided. Can we move around within it? Yes.” (Chevron Q4 2021 Earnings Call, 1/28/2022)

Chevron CEO: “I think the overarching message that investors should take away is, we’re going to stay disciplined on capital. We’re not chasing price.” “Mike Wirth — Chairman and Chief Executive Officer: Can that include additional short cycle? Yes. And as the project in Kazakhstan winds down, that opens up some capacity within that range to allocate capital to other high-return investments. And so we’ve got plenty of levers to pull. But I think the overarching message that investors should take away is, we’re going to stay disciplined on capital. We’re not chasing price. We’re improving returns and you can count on us to continue to do that. And we should generate very strong free cash flow in this environment.” (Chevron Q4 2021 Earnings Call, 1/28/2022)

Chevron’s CEO told Bloomberg: “We could afford to invest more. The equity market is not sending a signal that says they think we ought to be doing that.” “One reason executives are wary to plow investment dollars into new supply is shareholders haven’t shown they’re in their corner. They want cash returned to them immediately rather than seeing it re-invested in new developments. Although soaring commodities markets are “signaling we could invest more,” equity prices are sending boardrooms a different sign, Wirth said. “There are two signals I’m looking for and I’m only seeing one of them” right now, he said. “We could afford to invest more. The equity market is not sending a signal that says they think we ought to be doing that.’” (Bloomberg, 9/15/2021)