Chevron Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 27, 2023

There are 10 speakers on the call.

Operator

Welcome to Chevron's Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' remarks, there will be a question and answer session and instructions will be given at that time. As a reminder, this conference call is being recorded. I will now turn the conference call over to General Manager of Investor Relations of Chevron Corporation, Mr.

Operator

Jake Spiering, please go ahead.

Speaker 1

Thank you, Katie. Welcome to Chevron's 3rd Quarter 2023 Earnings Conference Call and Webcast. I'm Jake Spiering, General Manager of Investor Relations. Our Chairman and CEO, Mike Wirth and CFO, Pierre Breber, are on the call with me today. We will refer to the slides and prepared remarks that are available on Chevron's website.

Speaker 1

Before we begin, please be reminded that this presentation contains estimates, projections and other forward looking statements. Please review the cautionary statement on Slide 2. Now, I will turn it over to Mike. Thanks, Jake.

Speaker 2

I want to start by acknowledging the tragic events in the Middle East. We're deeply saddened by the loss of life and our hearts go out to those affected by the war. We continue to prioritize the safety and well-being of our employees and their families and the safe delivery of natural gas. Earlier this week, we announced that Chevron entered into a definitive agreement to acquire Hess Corporation. We expect this transaction to close in the first half 2024 and we look forward to providing updates in the future.

Speaker 2

Now turning to the Q3, We continue to make progress on our objective to safely deliver higher returns and lower carbon. By returning more than $5,000,000,000 to shareholders for the 6th consecutive quarter In delivering ROCE greater than 12% for the 9th consecutive quarter and investing in traditional energy by closing the PDC Energy acquisition And in New Energies, by acquiring a majority stake in a green hydrogen production and storage hub in Utah. And earlier this month, we released our climate change resilience report, which details our approach, Actions and progress in reducing carbon intensity and growing new lower carbon businesses. I encourage everyone to read the report available on chevron.com. At TCO, base business continues to deliver good results.

Speaker 2

The planned turnaround was completed ahead of schedule, The reservoir is performing well and the plant remains full. We expect a higher dividend in the Q4. PCO has achieved mechanical completion at the future growth project. Following slower than expected commissioning progress, we conducted an independent cost and schedule review. We now forecast the wellhead pressure management project, which is the field conversion from high pressure to low pressure To begin start up in the first half of twenty twenty four and to continue through 2 major train turnarounds.

Speaker 2

FGP is expected to start up in the first half of twenty twenty five and ramp to full production within 3 months. Total project cost is expected to increase between 3% 5%. TCO production on a 100% basis in 2024 It's forecasted to be about 50,000 barrels of oil equivalent per day lower than 2023 due to a heavier turnaround schedule And planned downtime for WPMP conversions. TCO is expected to reach greater than 1,000,000 barrels of oil equivalent per day in 2025 when FGP Fully ramps up. Free cash flow from TCO in 2025 is expected to be more than $4,000,000,000 Chevron's share at $60 Brent, Down about $1,000,000,000 from our prior estimate.

Speaker 2

Our focus remains on safe and reliable commissioning and start up. I'll now turn it over to Pierre to discuss the financials.

Speaker 1

Thanks, Mike. We delivered another quarter with strong earnings, Cash flow and ROCE. This quarter's results included 2 special items, a one time tax benefit of $560,000,000 in Nigeria And pension settlement costs of $40,000,000 Foreign currency benefits were $285,000,000 The appendix of this presentation contains a reconciliation of non GAAP measures. Organic CapEx this quarter included about $200,000,000 For PDC legacy operations after closing in August, our balance sheet remains strong, ending the quarter with a net debt ratio in the single digits. Another quarter of solid cash flow enabled us to deliver on all of our financial priorities.

Speaker 1

Despite restrictions during the PDC transaction, we were able to repurchase well over $3,000,000,000 in Chevron shares. Cash used to reduce debt was primarily related to PDC's higher cost borrowing. Cash balances ended the quarter near $6,000,000,000 a little above what's needed to run our businesses. Adjusted third quarter earnings were down $5,100,000,000 versus the same quarter last year. Adjusted upstream earnings were lower mainly due to realizations and negative timing effects.

Speaker 1

Higher unfavorable discrete tax charges and exploration expenses were partly offset by lower DD and A, Venezuela cash recoveries and other favorable items. Adjusted Downstream earnings decreased primarily due to a negative swing in timing effects And lower marketing margins. Compared with last quarter, adjusted earnings were down just over $50,000,000 Adjusted upstream earnings were roughly flat as higher prices and volumes were offset by unfavorable discrete tax charges And negative timing effects due to the rise in prices. DD and A and OpEx are both higher in part due to the addition of PDC legacy assets For 2 months in the quarter, adjusted Downstream earnings increased primarily due to higher refining margins, partially offset by unfavorable timing effects. All Other was down on unfavorable tax items And decreased interest income in line with lower cash balances.

Speaker 1

3rd quarter oil equivalent production was 6% over last quarter, primarily due to 2 months of legacy PDC production. This was partly offset by planned turnaround at TCO And pit stop at Gorgon. The Permian, excluding legacy PDC, was down 2% due to lower non operated production. Company operated production was flat with the Q2. Now looking ahead, our 4th quarter estimate for turnarounds and downtime includes Approximately 30,000 barrels of oil equivalent per day for Tamar.

Speaker 1

We anticipate affiliate dividends in the 4th quarter To be largely from TCO, as a reminder, we record a 15% withholding tax on TCO dividends. Due to the pending transaction with Hess, share repurchases will be restricted pursuant to SEC regulations. Chevron expects share repurchases in the 4th quarter to be around $3,000,000,000 plus or minus 20%, depending primarily on the timing of the Hess definitive proxy statement mailing. In summary, Our actions and performance show that Chevron keeps delivering strong results. With a strategy that remains clear and consistent, We're well positioned to deliver value to our shareholders in any environment.

Speaker 1

With that, I'll turn it back to Jake. That concludes our prepared remarks. We are now ready to take your questions. We ask that you limit yourself to one question. We will do our best to get all of your questions answered.

Speaker 1

Katie, please open the lines. Thank

Operator

We'll take our first question from Roger Read with Wells Fargo.

Speaker 3

Yes. Thank you. Good morning. I was hoping we could dig into the international upstream, just a little Short on what we were expecting this quarter, what some of the factors were other than the ones called out, the FX issue And the tax benefit in Nigeria.

Speaker 2

Yes. Roger, look, I'll let Pierre cover this in a little more detail. But there's I recognize this quarter was a tough one to model and there's pretty material or significant non cash charges. Timing effects, primarily inventory costs, we see with rising prices, some tax reserves and charges for legal abandonment and other things and then some lower realizations with your mix And the lag effect in some of our LNG pricing. On timing and inventory costs in particular, On period to period comparisons where we had a prior period, whether it was last quarter or the same quarter last year, where prices were coming down.

Speaker 2

And then in the current period, we see prices strengthening significantly. You really get a pretty significant deltas on the way we Cost inventory. And if you go back to the I think the Q1 of 2022, we had some similar dynamics. So anyway, That's kind of high level on it, Pierre. Maybe you can talk a little bit more about the upstream international upstream in particular.

Speaker 1

Yes. It's a subset of what you Talk to Mike, Roger. So timing effects, the largest timing effects this quarter were on cargoes on the water. So you'll see that primarily in the international upstream and international downstream. Primary effects are in 3 buckets.

Speaker 1

You have paper mark to market, You have on the water inventory and then you have on land inventory. So it's really cargoes on the water that drive most of the effect, cargoes that are in transit and crossover Quarterly periods. And so that's what the trajectory of prices as Mike indicated is really what drives that. Mike talked about abandonment estimates. So those will show up in depreciation and saw that in the international upstream.

Speaker 1

And then in LNG, you see some lag pricing. We also saw some mix between contract cargoes and spot cargoes on LNG. And on the liquid side, we saw some mix effects. So it's a bit of where the liftings are relative to production in terms of tax jurisdictions, The types of products, how they trade in terms of discounts to Brent. So there were a number of items in the international upstream and You can follow-up Roger with Jake and cover any more details.

Speaker 3

No, thanks. I'll sum it up as messy. I appreciate it. Thanks. We'll take our next question.

Operator

We'll take our next question from Josh Silverstein with

Speaker 3

UBS. Thanks. Good morning, guys. On the TCO, you had mentioned that in 2025, you had expected the Cash flow to be about $1,000,000,000 lower around $4,000,000,000 versus $5,000,000,000 previously. Is that just due to the project delays or is there Higher cost estimates now in that, so it'd be lower distributions from there?

Speaker 3

Or is there something else that's driving that?

Speaker 2

Yes. So, Josh, There's going to be some more capital. We said 3% to 5%. So think about around $1,000,000,000 severance share over 20 4 and 25, Probably a little more weighted to 24 than 25. Cash flow from The operations will be lower by about $1,500,000,000 at $60 Brent in total over the next 2 years, Really due to the delay in the project.

Speaker 2

So that's equivalent to about 50,000 barrels a day in that production in each of those Years. So in total, we expect our share of dividends to be lower by about $2,500,000,000 across $24,000,000 and 25, From the prior guidance and so it's a combination of those things. So we had previously guided to above 5, we're now seeing above 4. A little more of that coming from Production and cash flow from ops as opposed to CapEx.

Speaker 1

And the delay in WP and P doesn't have any impact really because there was no incremental production. So the effects that Mike was talking about in production are really from the delay in the start of FGP, which obviously adds incremental production.

Speaker 2

Thank you, Josh. Thanks.

Operator

We'll go next to Neil Mehta with Goldman Sachs.

Speaker 1

Yes. Thank you. I just want to stay on the TCO question. As you think about, Mike, the biggest Gaining factors to getting from here to completion around FGP, just give us Be watching to give us conviction that the project is coming into service.

Speaker 2

Yes. So The main message here, Neil, is as we completed Both WPMP and then mechanical completion of FGP and we've begun to get deep into the commissioning. We've I think previously mentioned we worked through some technical issues with our utility systems. And as we did that and we saw some of these impacts, We commissioned an independent cost and schedule review off cycle. We normally do these annually, but we didn't want to wait.

Speaker 2

And so as we saw some of this Evidence of things were going slower. There were some more discovery work. We sent in an independent team to give us a kind of a cold eyes assessment on cost and schedule. And I think the main thing that I would distill that down to is the recommendations from that And that are embedded in our updated guidance today, reflect a more conservative forecast of commissioning progress. And so we're assuming things will take longer than the prior plan.

Speaker 2

We're assuming we're going to have discovery items That tend to come up in complex projects like this. And in response, we've implemented some significant changes in terms of how we're approaching this. We've moved contract resources over from 3GI, which is a portion of the future growth project, which is now Completed and fully commissioned over onto the other commissioning work. So we've added contract resources that we brought in experienced turnaround and operations people That are very skilled in the discovery work, in managing through the restart of an operations of facilities now to help us with this. And then we've also added technical resources to address any unplanned discovery items that would come up.

Speaker 2

So we've Had a significant change in our approach to this. We've got a more conservative guidance here that we're issuing now And we'll continue to talk about this every quarter. I guess the main things to look at here are, We've got big compressor trains that will start up for pressure boost, which is a key driver of this high pressure to low Conversion, these are very large machines. And so those are key milestones. After that, we've got metering stations that are converted from high Low pressure.

Speaker 2

And so over the next few quarters, and there's I think 40 some odd metering stations as you go out through the entire field, we've got these 2 big turnarounds that I've talked about. All of those are really key milestones that we'll be tracking very closely and we'll update you on those As we go forward.

Speaker 3

Thank you.

Operator

We'll go next to Devin McDermott with Morgan Stanley.

Speaker 3

Hey, good morning. Thanks for taking my questions.

Speaker 1

I wanted to stick with upstream, but

Speaker 3

actually ask about Venezuela. You've had some increase in production year over year given the initial sanction relief, and there's obviously been some additional sanction relief announced just here Since the last quarterly call, I think you might have been on an interview this morning, you made some comments that you could see a sequential increase in production between now year end. I was wondering if you could just step back, Talk through what impact the expansion relief has on your production profile and also willingness to invest in that region? Can you remind us how impactful Venezuela volumes are for your corporate cash flow?

Speaker 2

Sure. Yes, we have seen some action now from the U. S. Government. We had been previously operating under an OFAC license, Which was modified at the beginning of this year, a general license or some specific licenses that go with that, that define the terms under which we can operate.

Speaker 2

The recent action in the new general license issued by OFAC really kind of opens up operating room for others More so than it does for us. We already it doesn't materially change our circumstances here. And so I think what you'll see is some more people lifting crude, bring it to the U. S. You'll see more crude flow to the U.

Speaker 2

S. I don't think the impact on our operations really is not Particularly significant. We are up to something around 130,000 barrels a day from maybe 60,000 barrels a day earlier this year, we still think we can get to 150 or so by year end. So we are seeing improvements and expect there's some more that we Can see through the balance of the year and that's Driving the cash from that is going to pay legitimate operating expenses, tax and royalties, recover some Past dues that we are owed and we're really working on what I would call pretty straightforward field maintenance And things to restore production that aren't particularly long cycle or capital intensive and staying within the Kind of cash is being generated from those sales in order to fund that. I would expect that's the posture we'll remain in for a while here Until we see how the longer term sanctions environment plays out, the political situation in the country with elections and the like And continue to make progress on recovery of the past dues that I mentioned.

Speaker 2

And Not a lot of change, I guess, I would say, from our point of view. Pierre, maybe you want to comment on the cash and production?

Speaker 1

Yes. Consistent with what Mike just said, we're continuing to do cost affiliate accounting, which means We are not we don't record production or reserves, right? So that's not reflected in our numbers and we only record earnings When we receive cash. So we're not recording a proportionate share of equity earnings, but only what we actually receive in cash. And that's something that we'll continue to look at.

Speaker 1

And as Mike said, depending on all those potential triggers down the road, elections and such, We could go back to equity accounting at some point in time, but we have not made that decision yet. In terms of cash flow, it's about 1% of our cash flow. So it's modest, of course, but it's more than it was before. And so as Mike said, operations there are continuing well and we're getting a little bit of cash and we'll just see where it goes from here. Great.

Speaker 4

Thank you.

Speaker 2

Thank you, Devin.

Operator

We'll go next to Biraj Borkhataria with RBC.

Speaker 3

Hi. Thanks for taking my question. I'm sure you got a few more on TCO. I just want to ask about the Permian. Last quarter, you

Speaker 5

gave some very Data points on well productivity this year. I was wondering, particularly for the New Mexico side, if you had any incremental comments for Well, it's driven in the Q3, because it was a pretty small sample size of POPs in the first half of the year. So any comments there would be helpful. Thank you.

Speaker 2

Yes. And I might give you some kind of broader commentary on Permian performance as well. Overall production Was down just a little bit about 2% in the quarter. That was entirely driven by non operated joint ventures. And primarily a couple of the operators had delays in putting wells online due to frac hits and some other factors.

Speaker 2

There was also some takeaway capacity on the Permian Highway constraints that resulted in some unplanned downtime. So Co op production in the Q3 was essentially flat from the prior quarter, which is what we had guided to. And that's despite having some wells that were choked back due to some surface constraints. In one development area, we're seeing higher than expected CO2 content in the gas and others in the area are as well. So we've got 3rd party handling and process facilities that are drained by that and can't handle all the CO2, so we're choking the wells back.

Speaker 2

There's a new federal regulation that I won't get into the details, but it affects How we meter production and it prevents commingling and so we got wells choke back until we can get some new meters in place. And then we've got some produced water limits that have come into effect in some areas. So there's a number of things that are not Indicative of well performance, but other surface realities that we're working our way through that are impacting co op production a little bit. In New Mexico, you're right. We got more POPs in the second half of the year.

Speaker 2

We've popped about 60% of the planned wells In New Mexico, so the balance almost half come on in the Q4. Pop performance has generally been strong. Some of those wells are hit by the Facility constraints that I've talked about, but overall well performance is aligned with our type curve expectations. I think when we get to the 4th quarter call, Biraj. We'll come back with some more detail on type curves.

Speaker 2

We'll have enough of them online. We'll have enough months that we can start to Give you some of the same kind of evidence that we did last quarter to show you the performance.

Speaker 3

Okay, understood. Thank you very much.

Speaker 2

Thank you.

Operator

We'll go next to Sam Margolin with Wolfe Research.

Speaker 3

Hi, Good morning. Thanks for taking the question. Good morning, Sam. Maybe we'll stick with the U. S.

Speaker 3

And ask about just the U. S. Upstream CapEx number, there's a lot of moving parts in here. You've got incorporation of PDC, you have kind of Projects in Balmor coming into play, inflation and then timing effects that you alluded to. I guess when you think about This quarter's U.

Speaker 3

S. Upstream capital, how would you characterize it just overall? Would you say it's sort of on plan or like overly influenced by Any one of these factors that may or may not be mitigated over time? Thank you.

Speaker 2

Yes. Sam, you're right. I mean, we are seeing pressure in the U. S. And I think we're going to probably end up higher And our budget is we end the year.

Speaker 2

PDC is being integrated into the factory pretty much as we expected. And so it's an increment because it In our original plan, but it's really not a driver of this. The big thing is, we're seeing Actually, more feet drilled per rig and more completion feet than we had planned. And so The productivity of the primary development activity has continued to improve, but that means we spend more money On tubulars, on sand, on water, then we had anticipated. So it's kind of a good news, but it brings with it some costs.

Speaker 2

We've got some long lead items where we're seeing supply chain realities that say we need to place long lead orders earlier. So some things we otherwise would have ordered next year that we've actually moved ordering and initial payments on into this year. So there's some long lead dynamics going on. And then I mentioned earlier, produced water is becoming an issue. The reinjection of that and doing that in a way that Minimizes the incidences of induced seismicity.

Speaker 2

So we've got some more produced water handling infrastructure spend. So I would say those are kind of the primary drivers and that's pushing the Permian to be a little hot. Gulf of Mexico is pretty well right on plan. And so What you're seeing there is really a function of PDC, which is just an increment that's been added and then some additional costs in The Permian program that we really hadn't anticipated as we went into the year.

Speaker 1

Hey, I'll just add. So if you take out Inorganic, which is $600,000,000 year to date, right, dollars 400,000,000 in the Q3 for primarily for ACES And the $200,000,000 that we had for PBC in the Q3 through Q3 year to date, we're about $200,000,000 above the ratable budget. Of course, Q4 tends to be higher. So as Mike says, we'll likely end the year a little bit above budget. Thanks, Sam.

Speaker 3

Understood. Thank you.

Operator

We'll go next to Paul Cheng with Scotiabank.

Speaker 4

Thank you. Good

Speaker 1

morning. Hi,

Speaker 4

Can I go back to TCO? It's a little bit of the late stage for the cost increase and everything. I guess the question is that, I mean, what have we learned from this process and to ensure that your future Project execution will become better and not facing the kind of problem that I mean, it has been a challenging project That all along due to a number of different reasons, but quite frankly that this is a bit disappointing At this very last stage for the bit of the slip in in the schedule and also the cost increase. Thank you.

Speaker 2

Yes, Paul. Thank you. And look, I share the sentiment. So I understand where you're coming from. Big complex project.

Speaker 2

You've been along for the whole ride. So early on there were some engineering issues that we confronted and addressed. In the middle of it, the big thing was the pandemic and demobilizing, remobilizing, building medical facilities and a whole bunch of stuff That we had to manage our way through and was complex and difficult and our folks did a great job, but it clearly impacted cost and schedule. And the big thing here, Paul, is as we've gotten into and you have to remember, this is we're redoing the Power infrastructure for the entire field, which is geographically speaking, it's an enormous Space. And this is infrastructure, frankly, it goes back a lot of it to kind of Soviet days.

Speaker 2

So there's an entire new Our distribution system, we're taking the entire field and taking it from high pressure production to lower pressure in the WPMP Process and then building the really large sour gas injection and incremental production Facilities. And it's almost a field wide refurbishment of a lot of it and then this big incremental production. And the commissioning of that is incredibly complex. And as we went in and did this Cost and schedule review early in the relatively early in the commissioning process based on what we were seeing, What became evident is that we need to account for that complexity in our schedule. And I don't think it was fully reflected In the schedule and in a big complex project like this, you find things.

Speaker 2

And early on, we found challenges in the utility system And it cost us some time and it that ripples through. And so the guidance we're giving you now Is really what I would say is it's more conservative because it assumes that those kinds of things are going to be encountered For the balance of the project and we need to set expectations that those are the realities that we're going to be dealing with. And so that's why the schedule lights all in commissioning, it's bulk construction is completed, every all the equipment is there. This really is the final commissioning process. If we do well, we could end up on the front end of those windows That I gave you, but we've given you those because our experience says we should not plan for that way to plan for the reality of these things.

Speaker 2

And as I mentioned in response to the earlier question by Neil, we've added incremental resources in multiple areas now To be to anticipate and be prepared for these kinds of challenges. And so I think the lesson is on the projects like this, of which there are few, In the future, our commissioning plans will reflect that complexity more completely than the commissioning plans did on this one.

Speaker 1

Hey, and I'll just add some comments on affiliate dividends. So we've given a guide on 4th quarter affiliate dividends, which falls short of the full year guide that we did at Start of the year. That shortfall is not from TCO. That's from CPChem, Sherwin Phillips Chemical Company on lower petchem margins. It's also from Angola LNG on lower TTF prices than we had assumed.

Speaker 1

We've also had some of the Angola LNG cash has come back to us at return of capital. In terms of TCO, we had a $600,000,000 dividend Chevron share in the Q2. We can't get ahead of the TCO board on the 4th quarter, but 90% or so of the Q4 guide is related to TCO. I'll remind you last year that TCO dividend was 1.6 1,000,000,000 Chevron share, all these numbers are before the withholding tax. So we'll see a pretty significant increase in the total year TCO dividend.

Speaker 1

Now some of that was the getting some of the excess cash off the balance sheet like we're talking about. But if you go back to the period prior to the start of this construction, so the period into 2015, we're seeing dividends now This year's dividend will be similar to what we saw, from that time period. So the inflection is happening after 5 years Either not receiving dividends or in fact putting cash out, essentially having negative free cash flow. So we know production is Going to be down next year, we showed that. So you'd expect dividends to reflect that a little bit.

Speaker 1

We have a little bit of increase in CapEx. And then we'll be heading to this more than 4,000,000,000 And 25 and all of that is that guidance is at 60. So we're seeing some positive news in terms of the cash flow coming out, clearly disappointing news

Operator

We'll go next to John Royall with JPMorgan.

Speaker 6

Hi, good morning. Thanks for taking my question. So I have a follow-up on the Permian ex PDC. You were down 2% in 3Q, including the non op piece. And really helpful color there from Mike on Biraj's question.

Speaker 6

But just it does leave A pretty big jump to hit guidance in 4Q around 10% if I calculate it right. So Are you sticking with that $770,000,000 guide for the legacy piece? And if not, is there a good way to think about 4Q production in general?

Speaker 2

Yes. John, we're not changing the guidance. Overall on production, excluding PDC, we expect to be at the lower end of overall guidance. Permian production is expected to ramp up In the Q4, full year production expected around 770, 780 or so if you include TDC, and so yes, the guidance is still intact for the Permian. Go ahead, Pierre.

Speaker 1

Yes. Mike talked about the 2% shortfall on non op, which averages about 0.5%. He talked about also some of these surface constraints. So we have worked To overcome the shortfall we saw in ONOP in 3rd quarter deliver that. So no change in guidance, but clearly, we have a little more work to do in the 4th Quarter to achieve it.

Speaker 1

We do expect though 4th quarter more POPs and more production, in line with the plan that we laid out earlier this year.

Speaker 3

Thank you.

Operator

We'll go next to Doug Leggate with Bank of America.

Speaker 7

Thanks. Good morning, everyone. Mike, I know you've been traveling around, so thank you for making the time for us this morning. I want to try and defend you a little bit here this morning because if you look at the remaining life of Tengiz, About half of that value has been taken out of your stock this morning. I can't imagine you're happy about announcing another series of challenges.

Speaker 7

So my question is this. At a philosophical level, how would you characterize what you and your management team and the organization are doing to avoid these Kind of issues on major projects going forward. You've got a lot of things in the queue through 2027. Why should the market Comfortable that you can execute on that timeline with what you have in your portfolio?

Speaker 2

Well, Doug, You're right. I think the there has been a reaction apparently in the market this morning to this. We've spent a lot of time, I'll go back to Jay Johnson spending time not only in these calls, but on traveling around talking about what we're doing on Capital project execution. This is a unique project and I won't repeat the things that I went through Earlier with Paul that this is a large multiyear efforts that had We've had our challenges with it. There are not projects in our queue that are remotely similar to this The kinds of things that we're talking about now are factory development projects across multiple shale basins, their deepwater Developments that, I think the track record on those is quite different.

Speaker 2

And I think the lessons on these really complex capital projects are that despite employing the best Engineering and construction firms in the world, bringing in partners that have strong capability, they are really complex and challenging. And part of the way we mitigate that is we'd be very selective about the ones we do. We walked away from the Kitimat LNG project because we Despite a lot of efforts to make that project better, we had concerns about execution in that kind of an environment And ultimately said, we're not going to take on a project like that, particularly at this point in time. And so Part of it is the way you choose what you do. Part of it is continuing to learn and apply those learnings, many of which from a decade ago have been implemented in To the TCO project, but some of which from the TCO project will be implemented and integrated into other projects that go forward of similar complexity.

Speaker 2

So, look, we're close to the finish line on this thing and we've got A full court press on it to make sure that the commissioning is safe and reliable and we have a clean startup. And the lessons from that will be applied in every other project that we do.

Speaker 1

And I'll just restate the impact that Mike Yes. Thanks, Doug. I'll just restate the impact that Mike talked about. It's $2,500,000,000 at $0.60 that's less than $1.50 a share. So clearly, we're down A lot more than that, we talked about the earnings mix.

Speaker 1

We know that weighs also on the shares at the same time non cash items, timing effects that reverse, Discrete items that are non recurring. So we feel good about the company's performance in the quarter in terms of how we operated safely and reliably, How we captured margin, we know, as Mike said earlier, we have these quarters where it can be messy, it can be noisy, it's one of them, but the underlying company is very strong and healthy.

Speaker 7

Great. It looks forward on Pierre. Thanks so much.

Speaker 1

Thanks.

Operator

We'll go next to Irene Himona with Societe Generale.

Speaker 8

Thank you very much. Good morning. You refer in your comments to higher OpEx and DD and A from the PDC legacy Having impacted Q3 Upstream, now that you own that business fully and you can sort of look under the bonnet, How are you thinking about your original synergy estimates on PDC, OpEx and CapEx? And how long would you expect it takes for those

Speaker 2

Yes, Irene, so I think the reference was simply these are additive versus prior periods. And so, I wouldn't want anybody to interpret that somehow they were different than what we expected because the OpEx and the DD and A are not different Than what we expected. Synergy capture is good. We're right on track to capture All of the synergies, no change to the guidance. We're confident that there's upside and we'll realize that over time as we have on other transactions.

Speaker 2

We think there's additional operational midstream and procurement synergies that we didn't build into our initial target And the CapEx synergy has been captured as well. So the nice thing about this in a quarter where I appreciate Doug's view that maybe the reaction here has been a little over. We closed the transaction 5 months ahead of guidance. We pick up additional production for a bigger part of the year. The earnings and cash flow To go along with that, we've already paid off some high cost debt.

Speaker 2

And so we're integrating that into our business now and it's a very sound Transaction that is going to deliver, I think everything that we expected, and then some.

Speaker 8

Thank you very much.

Speaker 2

Thanks, Irene.

Operator

We'll go next to Jason Gabelman with TD Cowen.

Speaker 1

Hey. Hello?

Speaker 2

Good morning, Jason. Yes, we're here. Hey.

Speaker 9

Sorry. Sorry about that morning.

Speaker 2

Sorry to wait, do you have

Speaker 9

a question? Yes. Hey, can you hear me?

Speaker 2

I can.

Speaker 9

Okay, good. I wanted to ask about what's going on in your Middle East footprint. You've obviously had to take Tamar offline. I believe that's a fixed price asset that you're receiving. So probably not a large cash impact, but if you could remind us What the cash impact is and the ability to maybe reroute that cash somewhere else or offset those losses?

Speaker 9

And then how you think about The East Yard Mediterranean growth profile overall, if there's any change how you're thinking about it in light Of the recent events over there? Thanks.

Speaker 2

Yes. I'll take the second part of that and then ask Pierre to address The cash and production impact. It doesn't change our view on the development opportunities really at all, Jason, this is a long term play. It's a very, very large gas resource. We like Some of the follow on exploration opportunities in the region.

Speaker 2

We're working on the Aphrodite field in the waters off Cypress to develop, we're working expansion projects that have been sanctioned on both Samar and Leviathan and further expansion ideas on Leviathan. And so We've got to take a long term view, which is measured in years decades. And when you have things in the short term that create The circumstances that we see right now, we have to be prepared to mitigate those risks and to keep people safe and maintain the integrity of our operations. But It doesn't change our long term view on the attractiveness of the asset and the development opportunities. I'll let Pierre address the cash question.

Speaker 1

Yes. We don't talk about our specific contracts and there's numbers of them. But I think in effect, you're right. There's some escalators tied to inflation. There's some oil price Sensitivity, but it's within sort of a floor and a ceiling.

Speaker 1

And these are regional gas prices that are well below international prices. So We don't know how long. We gave the guide on the production and the impact on cash flow is very modest. It's Tens of 1,000,000 of dollars in terms of doing the calculation. And so we'll just see where we end up in the quarter and how long it is shut in for.

Speaker 1

Thanks, Jason.

Speaker 9

Thanks, guys.

Operator

We'll go next to Ryan Todd with Piper Sandler.

Speaker 3

Thanks. Maybe I could switch gears a little bit to the Gulf of Mexico. Can you maybe provide Any update on an overall basis, do you anticipate the addition of the Hess assets on the Gulf to have any impact On your approach to the basin in the coming years. And then, you're scheduled to have 3 separate projects, I think at anchor St. Malo and Will come on stream during 2024.

Speaker 3

Could you maybe update us on the progress of those projects and maybe the timing whether we should expect those in the first half or the second half of the year?

Speaker 2

Sure. So on the combination with Hess, I think we'll come back to you As we close the transaction and we integrate those, we're partners in a couple of projects that they operate. We both have lease positions out there. I think you would Expect us to high grade the exploration program as we look across a larger combined lease position and But we'll talk to you more about that as we go forward. In terms of specific projects, yes, you're right.

Speaker 2

We've Mad Dog 2 actually saw 1st oil this year and we expect peak Next year on Mad Dog 2, you can refer to the operator for more on that. Anchor and Whale are both expected for First Oil Next year, Anchor is 7 wells in total, 2 that will be online in 2024, 3 in 2025 or no, 2 in 2025, 2 in 26 and 1. Then in 27, the FPU is safely moored out there in the field right now. The Manifold and pump systems and subsea manifolds are all fabricated. We've landed and tested the 20,000 PSI Blowout preventer.

Speaker 2

So that project is moving along nicely. Production in 2024 It's modest because there's only a couple of wells online. Think of it mid year in terms of general timing. I'd refer to Shell on the Whale project, first oil, probably the latter part of 2024 And a similar kind of a profile where you've got a smaller number of wells online initially and then Over the subsequent couple of years, you're going to see additional wells come online. And so the production impact of that Starts to show up in 2025 and 2026 in a greater way than it does in 2024.

Speaker 2

And then Ballymore is actually first oil in 2025, not 2024, but that will come online In 2025, simpler development tiebacks to blind faith, 3 wells, 2 of which would be online in 2025, the third one would come online in 2026. And so again, the production on that A little bit in 2025 and then you'll see more of it in 2026 and 2027.

Speaker 1

Hey, Ryan, just more broadly on Hess. We are not planning to hold our Investor Day at our usual timing. We'll likely either have just closed or will be in the antitrust review process. This is a big transaction. It impacts in Gulf of Mexico, but transforms the portfolio overall.

Speaker 1

We gave some guidance on potential asset sales also. So you should expect us to do an Investor Day several months after we close and when we have time to really put together a combined business plan for our investors.

Speaker 5

Okay. Thank you. Thanks, Ryan.

Speaker 2

Thanks, Ryan.

Operator

We'll go next to Bob Brackett with Bernstein Research.

Speaker 2

Good morning. You've spent part of the week engaging with your shareholder base and making the case for the acquisition of Hess. Can you talk to not details obviously, but perhaps the tone of those conversations, the enthusiasm, anything that surprised I'd say overall, of course, we met with I was out, Pierre was in some separate meetings than I was, but I was In a number of meetings with John Hess, sometimes with larger Hess shareholders, sometimes with larger shareholders. I would say, in general, people see the long term value proposition very clearly here. And I think they see it as a combined company that is stronger and one that is set up to be stronger for longer With the ability to really sustain cash distributions to shareholders in a very Consistent, predictable and durable fashion long into the future.

Speaker 2

And so that is there's no doubt about that. Some of the questions On the one side, did you get a high enough price? On the other side, did you pay too much, right? So there was tension In that, to be honest, during the negotiation that was as we've mentioned, this has been going on for some time. And John and I have been looking for A way to do a deal that is actually one that's good for both sets of shareholders and not easy because it's a great asset and the market recognizes that value.

Speaker 2

And so I think you can find nuances from people who either held one of the stocks or the other for certain reasons and maybe this wasn't Exactly what they expected, but broadly speaking, I would say, people see the long term value creation, they see the transparency to Resource depth to production growth, the fact that you now have with Hess, you've got a much more diversified set of assets attached To their portfolio, which de risks any one of those assets and it brings forward cash distributions to their shareholders meaningfully, That would have still been several years into the future. For the Chevron shareholders who were wondering what comes next after what they can Currently see over the next several years in our portfolio, rather than us pointing to a range of potential answers to that and say we'll do the best of these and we've got Plenty of organic investment opportunities we're working on. I think it gives some confidence and certainty of what underpins that for the future. And so Broadly speaking, those are the kinds of discussions that we've had. Very clear.

Speaker 2

Thanks.

Operator

We'll go next to Neal Dingmann with Truist Securities.

Speaker 3

Good morning, guys. Thanks for the time. My question, Mike, is more on your shareholder return. You continue to have great financials and the shareholder return both on the dividend and the buyback side continues Be quite high paying out a bit over 100% of your free cash flow. I'm just wondering as you continue to have the growth opportunities ahead you do, You see any change in that shareholder return, particularly on the share buyback or you continue to try to balance kind of the growth and buyback programs you have now?

Speaker 2

Yes. We've had a very consistent set of financial priorities for many, many years. The first of which is to sustain and grow the dividend, 36 consecutive years now of per share dividend payouts. The last 5 years has 6% CAGR, actually I think the last 15 years have been a 6% CAGR and an announcement of 8% early next year subject to Board approval. I think there's a strong track record there you can expect to continue.

Speaker 2

2nd is to be disciplined in organic reinvestment into the business to grow those cash flows. You can be confident that we will continue to be disciplined in that reinvestment to drive returns and value. Number 3 is a strong balance sheet. Pierre mentioned we're single Digit net debt ratio today, that's lower than we have guided to over time. And so, over time, you can expect the balance sheet to move back You've got a range now of $10,000,000,000 to $20,000,000,000 worth of high end of that range when we close the transaction with Hess worth $17,500,000,000 annually.

Speaker 2

Today, that's 5% to 6% of our float each and every year. And we've I won't go through the details, But we've indicated we can sustain that in a lower priced environment and that's where the lower end of that range would apply And certainly in a higher price environment, which is where we find ourselves today, we're at the high end of that range. And so we would expect to be consistent, predictable And to sustain that, I mean, consistent and durable being the key words here. So I think the broad framework is Likely to remain unchanged. And I think our behavior will be very consistent with what you've come to see from us historically.

Speaker 3

Perfect. Thanks, Mike.

Speaker 2

Thank you, Neil.

Operator

We'll take our final question from Alastair Syme with Citi.

Speaker 3

Thanks. Hi, Mike, Biren, Jake. Mike, can I go back to Hess? For several years, Chevron has looked a bit different to the other integrated oil companies in terms of the low downstream exposure. And of course, now you're reweighting even further to the So does that balance bother you at all?

Speaker 3

Or maybe how do you think about what an integrated oil company is?

Speaker 2

Yes, Alistair, the short answer is no, it doesn't bother me. We actually have been becoming a more downstream weighted company in the last several years. And that may not be obvious to most people, but we've been Under our CapEx into the upstream has been below our depreciation. So our upstream business has been declining as a percentage of capital employed. In the Downstream, we've made some big investments.

Speaker 2

We acquired a refinery in Texas. We acquired a renewable energy company. We've invested in New petrochemical facilities, we had 2 more of those petrochemical expansion projects underway right now. And so We had gone from 80 20 waiting or 8515 waiting upstream to downstream in chemicals to eightytwenty over the last few years. When we close this transaction, we'll be back at eightytwenty, which is or 85 15, I'm sorry, which is where we've historically been.

Speaker 2

And that reflects a fundamental view that we believe that over the cycle returns in the Stream are likely to be structurally higher than in the downstream, primarily because refineries are hard to close. They get built for reasons other than just pure economics And governments tend to intervene in transportation fuels markets, in particular when prices are high, which kind of takes you out of full cycle And they kind of clip can tend to put the peaks off of those, whereas in the upstream, you got declining resource base and you got growing demand. And so the fundamentals rebalance more quickly. You remove a little bit of investment and you see decline takeover and you see demand continue to grow. And so Markets again, imbalance in the upstream, rebalance more quickly.

Speaker 2

We also have been more oil weighted than some of our peers. And fundamentally that reflects a view that there are more alternatives to substitute for gas, particularly in power generation Then there are for liquids in transportation. And so those are kind of high level The drivers of why our portfolio has been constructed the way that it is. We want to be an integrated company. We think there are real opportunities to capture Economic value through integration, to build the capabilities to run our entire business by bringing capabilities, technology, skills to bear Across those different segments, but our peers are all weighted more to the up than the downstream.

Speaker 2

The ratios are a little bit different. And we've long held those views and constructed a portfolio that reflects them. Thanks for the question. Thank you, Mark. You bet.

Speaker 1

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

Operator

Thank you. This concludes Chevron's Q3 2023 earnings conference call. You may now disconnect.

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Earnings Conference Call
Chevron Q3 2023
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