Chevron's Management Discusses Q2 2013 Results - Earnings Call Transcript

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Chevron Corporation (CVX) Q2 2013 Results Earnings Call August 2, 2013 11:00 AM ET

Executives

Pat Yarrington - Vice President and CFO

George Kirkland - Vice Chairman and EVP, Upstream and Gas

Jeff Gustavson - General Manager, Investor Relations

Analysts

Paul Sankey - Deutsche Bank

Evan Calio - Morgan Stanley

Arjun Murti - Goldman Sachs

Ed Westlake - Credit Suisse

Doug Leggate - Bank of America Merrill Lynch

Paul Cheng - Barclays Capital

Jason Gammel - Macquarie

Iain Reid - Jefferies

Faisel Khan - Citigroup

Operator

Good morning. My name is Sean, and I’ll be your conference facilitator today. Welcome to Chevron's Second Quarter 2013 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. (Operator Instructions) As a reminder, this conference call is being recorded.

I’ll now turn the conference call over to the Vice President and Chief Financial Officer of Chevron Corporation, Ms. Pat Yarrington. Please go ahead.

Pat Yarrington

Hey thank you, Sean. Welcome to Chevron’s second quarter earnings conference call and webcast. On the call with me today is George Kirkland, Vice Chairman and Executive Vice President of Upstream and Gas, and Jeff Gustavson, General Manager for Investor Relations. We will refer to the slides that are available on Chevron’s website.

Before we get started, please be reminded that this presentation contains estimates, projections and other forward-looking statements. We ask that you review the cautionary statement shown on slide 2.

Slide 3 provides an overview of our financial performance. The company's second quarter earnings were $5.4 billion, or $2.77 per diluted share. Return on capital employed for the trailing 12 months was about 16%. Our debt ratio at the end of June was approximately 12%. In the second quarter we repurchased $1.25 billion of our shares and in the third quarter we expect to repurchase the same amount.

Turning to slide 4, cash generated from operations was $8.5 billion during the second quarter and $14.2 billion year to date. On last quarter’s call, I noted adverse working capital effects which reduced first quarter cash generation. In the second quarter, we saw some but not complete reversal of these effects. We expect further working capital release as remainder of the year unfolds.

In June, the company executed a $6 billion bond offering taking advantage of historically low borrowing costs. Capital and exploratory expenditures were $8.6 billion during the second quarter and $16.8 billion year to date. The year to date amount includes incremental resource acquisition outlays associated with Kitimat in Canada, Cooper Basin in Australia and Kurdistan. George will speak to the value drivers behind these additions a little later.

At quarter end, our cash balances exceeded $22 billion giving us a net cash position of approximately $2 billion. As we indicated to you in March and as you saw in the first quarter, the company is moving toward a more traditional net debt structure.

Jeff will now take us through the quarterly comparison.

Jeff Gustavson

Thanks Pat. Turning to slide five, I'll compare results of the second quarter 2013 with the first quarter 2013. As a reminder, our earnings release compares second quarter 2013 with the same quarter a year ago. Second quarter earnings were $5.4 billion, about $800 million lower than first quarter results.

Upstream earnings were down $967 million, reflecting lower liquids realizations and higher operating expenses associated with increase maintenance activities, partly offset by a favorable swing in foreign currency effects.

Downstream results increased $65 million between quarters. The increase was driven by higher downstream volumes following heavy maintenance during the prior quarter, which was partially offset by an increase in operating expenses in lower chemical earnings. The variance in the other bar largely reflects favorable corporate tax items during the quarter.

On slide six, our U.S. Upstream earnings for the second quarter were $49 million lower than first quarter's results. Lower realizations decreased earnings by $25 million, driven by decline in crude oil prices, partially offset by an increase in natural gas prices.

Higher production volumes, primarily from our San Joaquin Valley, California and Delaware Basin, New Mexico operations increased earnings by $40million. The other bar reflects a number of unrelated items, including higher operating expenses related to maintenance and other production related activities, as well as slightly higher exploration expenses.

Turning to slide seven, International Upstream earnings were $918 million lower than the first quarter. Realizations decreased earnings by $550 million, average liquids unit realizations declined by 8% in line with the decrease in average current spot prices between quarters.

The timing of lifting in Kazakhstan and across multiple other countries decrease earnings by $60 million, higher operating expenses due to increase maintenance activities in the startup of the LNG plant in Angola, decrease earnings by $195 million between periods.

A favorable swing in foreign currency effects improved earnings by about $105 million. The second quarter had a gain of about $275 million, compared to a gain of about $170 million in the first quarter. The other bar includes the absence of favorable tax effects during the first quarter and higher exploration expenses.

Slide eight; summarizes the quarterly change in Chevron’s worldwide net oil equivalent production. Production decrease 63,000 barrels per day between quarters. Lower prices increase volumes under production sharing in variable royalty contracts during the second quarter by about 5,000 barrels per day.

Plan turnaround activities in Kazakhstan and Australia have the largest impact reducing production by 45,000 barrels per day. The base business in other bar includes normal fuel declines in lower natural gas demand primarily in Thailand.

Turning to slide nine, U.S. Downstream earnings were essentially flat between periods. Higher volumes increased earnings by $245 million at several refineries came back on line during the second quarter, following a particularly heavy maintenance period during the first quarter.

Stronger margins increased earnings by $50 million due to lower crude prices, as well as tighter product inventories, operating expenses increased by $180 million largely due to higher fuel consumption, transportation and environmental related expenses.

Lower chemicals results reduced earnings by $110 million, primarily due to lower ethylene margins and reduced volumes on planned and unplanned downtime at two separate plans.

On slide 10, International Downstream earnings improved by $63 million between quarters. Higher volume increased earnings by $80 million primarily on the absence of maintenance activities at the Cap Town, South Africa and Burnaby, Canada refineries. Higher operating expenses decreased earnings by $50 million reflecting higher fuel usage and employee cost.

The other bar includes a number of unrelated items including an unfavorable swing in foreign exchange impacts and weaker refining margins, partially offset by positive inventory evaluation effects driven by following prices during the second quarter.

Slide 11, covers all other. Second quarter net charges were $350 million, compared to $439 million in the first quarter, a decrease of $89 million between periods. Favorable corporate tax items resulted in $145 million benefit to earnings, while corporate charges were $56 million higher this quarter.

In part, higher corporate charges reflected an asset impairment as noted in our interim update. Year-to-date net charges in the All Other segment were 789 million at the end of the second quarter. We believe our quarterly guidance range of $400 million to $500 million for the All Other segment is still appropriate going forward.

George is now going to provide an update on our upstream operations. George?

George Kirkland

Thank you Jeff and good morning. To begin, I’d like to note the progress of our Jack/St. Malo and Big Foot projects for the Gulf of Mexico. This photo shows the hulls of both platforms at the yard in Ingleside, Texas. The topside modules and hulls of the projects are currently being integrated. Since this photo was taken, additional modules were set on top of the Big Foot, which is pictured on the left. The Jack/St. Malo towed to its location is scheduled for year end. Jack/St. Malo and Big Foot remain on schedule for 2014 startup and these are important contributors to our 2017 production target, supporting our profitable growth.

Now let’s take a look at our financial performance on slide 13. Our 2013 year-to-date upstream earnings margin was $23.88 per barrel. Based on first half results for the peer group, we continue to lead the competition by a considerable margin. We are almost $6.50 per barrel ahead of our nearest competitor. We have now held this top position for 14 consecutive quarters. This result flows from the quality of our investment decisions, the strength of our portfolio and the strong execution performance of our base business and projects.

I’m also very pleased with our upstream return on capital employed which is almost 20%. I expect this to rank at the top of our peer group.

Now I’ll cover our 2013 production on slide 14. Production in the first half of the year averaged 2.61 million barrels a day, at an average year-to-date Brent price of $107.50 per barrel. The first half results are near our forecast, giving our planned turnaround and maintenance activity. We anticipate an increase in production in the second half of the year. Our 2013 production guidance remains unchanged at 2.65 million barrels a day at an average Brent price of $112 per barrel.

I’m pleased that Angola LNG has achieved startup and has now loaded two cargoes to date with another preparing to load. This significant milestone is the result of the hard work of many individuals in Angola and around the world. For the second half of the year, we anticipate Angola LNG will be ramping up and will be a large contributor to our production. We plan to load at least 13 cargoes by year end. Remember, at peak rates, ALNG should contribute about 60,000 barrels per day to our production. We will have additional production rampups from our other major capital projects including Usan and Tahiti 2. We restarted Frade in Brazil at the end of April and currently have 3 production wells online. As seen in the graph production growth in the second half also comes from our base operations. This includes additional cost recovery from production sharing contracts, additional production out of the Marcellus and an increased drilling activity in the Permian. These increases are partially offset by the planned turnarounds.

Overall in 2013, we expect to have a similar level of turnaround activity as we had in 2012 and relatively heavy for both these years. We continue to have confidence in meeting our 2017 growth target as we bring on new projects and other key developments.

I would like now to update you on the status of a few key projects. Turn to slide 15. Gorgon is now almost 67% complete. Barrow Island construction has achieved major milestones including the installation of the second gas turbine generation for Train 1.

The third of five generators for the site will arrive later this year. Seven major process modules are on their foundations and now 11 of the 51 modules are on Barrow Island. The remaining 10 Train 1 modules are schedule for delivery by year end.

We also recently completed the installation of the 20-inch domestic gas pipeline. The Gorgon team has resolved the logistic challenges they faced earlier, additional lay down areas on Barrow Island were established and material handling has significantly improved.

Increase transportation capacity has allowed the project to exceed material delivery targets. Construction productivity has improved in some key areas and our team is focused on increasing productivity across the Broad for Barrow Island construction.

Gorgon module fabrication is progressing and we are managing it closely. We also continue to carefully monitor labor costs and weather impacts.

In the Upstream, the first five sea -- subsea wellheads were set. We have finished the lower completion of all the Gorgon wells and 50% of the [Jens Iago] wells. As one of our key legacy assets, with over 200,000 barrels a day of production net Chevron share, Gorgon will be a major contributor to our future financial performance.

We have posted several updated photos of progress made at both Gorgon and Wheatstone on our Investor website located at chevron.com, and I’ll encourage you to go there and look them.

Next, I will review progress on some of our other key developments. Wheatstone made significant progress in 2013, with the team focused onsite infrastructure and upstream fabrication. We now have over 2,200 people onsite at Onslow.

The offshore platform fabrication began in South Korea with erection of the seller deck. Offshore dragging began for the pipeline. The first phase of the construction village has been completed and the new runway at Onslow airport is nearing completion. The remaining activities for 2013 focused on site work to prepare for module deliveries in 2014. Wheatstone remains on target for a late 2016 startup.

Kitimat marked an important milestone on July 1 st , with the transfer of operatorship for LNG plant in the Pacific Trail Pipeline development to Chevron. Front-end engineering is progressing on plan. Early earthworks continue at the LNG plant site were a total of 6.5 million cubic yards of earth and rock have to move.

LNG marketing activities and engagement with potential foundation customers are underway. We are focusing on Asian markets and aimed to have 60% to 70% of the LNG volumes under long-term commitment prior to a final investment decision.

In mid-July, we entered into an arrangement with YPF to facilitate the development of a section of the Vaca Muerta Shale Basin, which has a significant potential for both liquids and gas production.

This initial program includes 100 wells in a Pacific portion of 96,000 acre development area. This development provides a new opportunity that we believe will be competitive with other projects in our portfolio.

Above ground risk, have largely been mitigated through government decrease and the financial structure, all in all we are pleased with the deal and the opportunity to participate in the development of this world-class resource. The projects that I’ve just been reviewed provide legacy growth and production, and cash flow.

Now I’ll provide an update on our exploration activities. Please turn to slide 17. We have another active year of exploration, where we all plan to invest over $3 billion. We're making great progress in our key focus areas of the Gulf of Mexico, West Africa, Australia and North America unconventionals.

Outside of those areas, we have a mixture of conventional and unconventional exploration enhanced by key acreage additions. We have drilled or currently drilling 10 of our 14 plant impact wells for 2013, including the second well in the Kurdistan region of Iraq which spud on Wednesday.

Now I will highlight a few areas of new activity for 2013. We are maintaining our emphasis on the Permian portfolio and we are increasing drilling activity in exploration, appraisal and development. We’ve enhanced our position in the liquid rich Delaware basin and are now the largely leaseholder with significant potential in undeveloped acreage.

We drilled our first two wells in the Utica in Ohio and are encouraged by the preliminary results, and we will provide more details on this later this year. We’ve added another block in Kurdistan -- in the Kurdistan region of Iraq and our plan is to complete and begin testing two wells this year. Our Australian portfolio has increased with the addition of acreage in the Cooper Basin tight gas [point]. Exploration and appraisal wells are in progress.

We’ve also acquired new acreage in China, Brazil, the US Gulf of Mexico and Morocco. Finally we just announced an agreement for the acquisition of additional acreage in the liquids rich region of the Kaybob, Duvernay basin. This complements our existing acreage position where we had drilled 10 of our 13 well program. Results for these stage fracs are positive with significant condensate yields. These portfolio additions demonstrate how we continue to selectively capture future growth opportunities remaining focused on value, adding assets that can sustain our strong financial performance.

Now I’ll turn it back to Pat.

Pat Yarrington

Turning to slide 18, George just provided an update on recent upstream activity, three milestones were met in the quarter in our downstream business. First, the Richmond refinery successfully restarted. By quarter end, the refinery was fully operational and running at planned utilization rate. Second, GS Caltex’s Yeosu refinery began commercial operation of the heavy oil upgrading unit which now makes Yeosu one of the largest heavy oil upgraders in South Korea. This unit came online three months ahead of schedule.

Third, our chemical joint venture Chevron Phillips Company announced plans to expand its ethylene production at its Sweeny Complex in Texas.

I will close by highlighting our continued strong performance on total shareholder return as shown on this slide. We continue to lead the peer group by a significant margin which shows we are executing well against the right strategies. I would also like to point out the balanced manner in which our returns were achieved. We know the importance of not only providing returns via a competitive and growing dividend but also from disciplined reinvestments in our business to generate future value. We are fully committed to delivering disciplined growth and shareholder value and our objective is to continue to lead the peer group on total shareholder returns for a long time to come.

We appreciate you listening in this morning and your interest in the company. And now I would like to open the microphones for questions. We do have a full queue, so please limit yourself to one question and a single follow-up if necessary. We will do our best to see that we get all your questions answered.

Sean, please open up the lines for questions.

Earnings Call Part 2:

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