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Edited Transcript of CVX earnings conference call or presentation 28-Jul-17 3:00pm GMT

SAN RAMON Jul 31, 2017 (Thomson StreetEvents) -- Edited Transcript of Chevron Corp earnings conference call or presentation Friday, July 28, 2017 at 3:00:00pm GMT

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* Phil Gresh

JPMorgan - Analyst

* Evan Calio

* Paul Cheng

* Jason Gammel

* Neil Mehta

Goldman Sachs - Analyst

Evercore ISI - Analyst

Tudor, Pickering, Holt & Co. - Analyst

* Ryan Todd

Deutsche Bank - Analyst

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Operator [1]

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Good morning. My name is Jonathan and I will be your conference facilitator today. Welcome to Chevron's second-quarter 2017 earnings conference call. (Operator Instructions). As a reminder, this conference call is being recorded.

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

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Pat Yarrington, Chevron Corporation - VP and CFO [2]

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Good morning, and thank you, Jonathan. Welcome to Chevron's second-quarter earnings conference call and webcast. On the call with me today are Jay Johnson, Executive Vice President, Upstream; and Frank Mount, General Manager of 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 here on slide 2.

I will begin with a discussion of our second-quarter 2017 financial results, and Jay will then provide an update on our upstream business prior to my concluding remarks.

Turning now to slide 3, an overview of our financial performance. The Company's second-quarter earnings were $1.5 billion or $0.77 per diluted share. Included in the quarter were impairments and other charges of $430 million as well as asset sale gains of $160 million. Excluding these special items and foreign exchange gains of $3 million, earnings for the quarter totaled $1.7 billion or $0.91 per share. A detailed reconciliation of special items and foreign exchange is included in the appendix to this presentation.

Cash from operations for the quarter was $5 billion, reflecting high margin production growth and strong downstream performance. Excluding working capital, cash flow from operations was $5.3 billion. At quarter end, debt balances stood at approximately $43 billion, more than $3 billion lower than where we began the year. Our debt ratio is currently 22.7%.

During the second quarter, we paid $2 billion in dividends. Earlier in the week, we announced a dividend of $1.08 per share payable to stockholders of record as of August 18, 2017. We currently yield 4.1%.

Turning to slide 4, year-to-date net cash generation, after dividends, was $1 billion, including $200 million generated in the second quarter. This result is a solid down payment on our full-year objective of being cash balanced at $50 Brent, including asset sales.

Cash flow from operations was $5 billion in the quarter, up $2.5 billion from the second quarter of 2016. Year to date, cash from operations has totaled $8.9 billion, despite working capital consumption and adverse deferred tax impacts, each sized at approximately $1.2 billion, as well as affiliate earnings exceeding dividends by $1.4 billion.

Cash capital spend for the quarter was $3.2 billion, approximately $1.3 billion less than the second quarter of 2016. We continue to reduce our spend by finishing our major capital projects under construction and driving capital efficiency gains throughout our investment queue.

Second-quarter asset sale proceeds were approximately $430 million, primarily from the sale of properties in the San Juan basin in New Mexico and Colorado, and some on the Gulf of Mexico shelf.

Looking ahead to the second half of the year, we expect our cash outcomes to favorably reflect growing production and additional proceeds from asset sales. Despite some anticipated unevenness between third quarter and fourth quarter -- for example, related to the precise timing of sales transactions, pension contributions, and affiliate dividends -- we do fully expect to end the year in a cash balanced position at current prices.

Slide 5 compares current-quarter earnings with the same period last year. Second-quarter 2017 results were $2.9 billion higher than second-quarter 2016. Special items, primarily the absence of $2.4 billion in second-quarter 2016 net charges, partially offset by current-period net charges of $270 million, improved earnings by $2.1 billion between periods. An unfavorable movement in foreign exchange negatively impacted the earnings comparison by $276 million between periods.

Upstream earnings, excluding special items and foreign exchange, increased nearly $950 million between periods. Increased volumes and higher realizations, as well as lower operating expenses, were partially offset by increased DD&A associated with increased production.

Downstream earnings, excluding special items and foreign exchange, increased nearly $380 million primarily driven by higher margins and a swing in timing effects.

The variance in the Other segment was primarily due to unfavorable corporate tax items. As we have indicated previously, quarterly results in the Other segment are likely to be non-ratable, and we continue to guide to $1.6 billion in annual net charges for this segment.

I'll now pass it over to Jay.

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Jay Johnson, Chevron Corporation - EVP, Upstream [3]

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Thank you, Pat. Slide 6 compares the change in Chevron's worldwide net oil equivalent production between the second quarter of 2017 and the second quarter of 2016. Second-quarter 2017 production was 2.78 million barrels a day, an increase of 252,000 barrels a day, or 10% over the second quarter of 2016.

Major capital projects increased production by 265,000 barrels per day as we started and ramped up multiple projects, including Gorgon, Angola LNG, Jack/St. Malo, Alder, Moho Nord, Mafumeira Sul, and Bangka.

Shale and tight production increased by 41,000 barrels a day, primarily due to growth in the Midland and Delaware Basins in the Permian. The increases were partially offset by normal field declines and PSC effects. The Other bar includes the loss of 38,000 barrels a day due to 2016 asset sales.

Turning to slide 7. Year-to-date 2017 production is 2.73 million barrels a day, up 5% from 2016, and within our guidance range of 4% to 9% growth, excluding asset sales. Our expectation is that full-year production will be well within our original guidance range. The ramp-up of production in the second quarter was strong, with June's monthly production at 2.85 million barrels per day.

Looking ahead to the second half of the year, we expect to see reliable production from the assets that are currently onstream, further growth in the Permian, and Wheatstone coming online.

Some of these increases will be offset in the third quarter due to normal turnaround activity. Year-to-date, there's been no impact on production from 2017 asset sales, since the first transactions involving producing assets closed on June 30.

Assets sold year-to-date and assets expected to be sold later this year have a combined daily production of around 175,000 barrels per day. The impact on full-year 2017 production from asset sales is expected to be 25,000 to 75,000 barrels a day, given the late-in-year timing for the sales.

Turning to slide 8. We're seeing strong performance at Gorgon. All three trains have achieved or exceeded nameplate capacity, and are operating smoothly. On a 100% basis, second-quarter Gorgon production was 333,000 barrels of oil equivalent per day, and is currently averaging around 430,000 barrels a day. We are currently producing around 3 billion cubic feet of gas a day from 14 wells.

In the second quarter, domestic gas sales were approximately 125 million cubic feet per day, and condensate production was around 14,000 barrels a day. We shipped 88 LNG cargoes so far this year.

Looking forward, we're focused on achieving sustained operations and are analyzing plant performance to find opportunities to increase reliability and production. Additional fine-tuning of the plant will maximize efficiency, and we expect further debottlenecking opportunities to increase plant capacity.

Turning to slide 9. We're on track at Wheatstone. The Wheatstone platform and pipeline are operational and supplying natural gas to the inlet of the onshore LNG plant. Early well performance is encouraging. We're in the process of starting up the plant, and expect to commence cool down shortly. LNG production is expected to follow next month. Train 2 construction is progressing well, and we're on track to start up 6 to 8 months after Train 1.

Turning to slide 10. The Future Growth Project, or FGP, is progressing well, and I'll highlight some milestones. Module fabrication is in progress in Korea and Kazakhstan, as is the fabrication of gas turbine generators in Italy. Dredging is essentially complete, and other activities required for the initiation of port operations are on track. Infrastructure work and site construction are progressing, and we're 75% complete with our piling program. We have two drilling rigs in operation on multiwell pads with a third rig expected in August. We're on track for first production in 2022.

In addition to FGP, we're also making progress on a number of other major capital projects. At Hebron, offshore Canada, the platform's been installed on location and we expect first oil before year-end 2017.

Projects expected to come online in 2018 include Clair Ridge in the North Sea, where offshore hookup and commissioning is well underway; the Stampede platform in the Gulf of Mexico, which was recently installed on location; the Big Foot platform, which is preparing for sail away around the end of this year; and Tahiti, where we are progressing the vertical expansion project.

These projects are expected to add approximately 20,000 net barrels of new production in 2018 and 65,000 net barrels in 2019.

Let's turn to slide 11. This is an updated map of the Permian Basin, including Southeast New Mexico and West Texas. Our 2 million acres, 1.5 million of which are Midland and Delaware Basins, are depicted in blue. Outlined on the map are our Chevron operated and nonoperated development areas.

Additionally, on the right side of the chart, we have included an updated version of our assessment of acreage valuation. Currently, we estimate that approximately 650,000 of our acres have a net value in excess of $50,000 an acre; and an additional 450,000 acres have a net value between $20,000 and $50,000 per acre.

The balance of our acreage is a mix. Some is of lower quality, some is still under evaluation, some lacks nearby infrastructure, and other requires further appraisal. As a reminder, these estimates are a snapshot that assumes simultaneous development at a $50 WTI price, burdened with all the development and production costs as we see them today.

Let's turn to slide 12. This slide illustrates our returns-focused Permian development strategy. We're investing for value. We're applying technology and learning from others to drive capital efficiency.

Let me provide a few examples of how we're using technology as a competitive advantage. We're using seismic data to detect variations in the properties of reservoirs to identify the optimal areas. We are then applying petrophysical modeling to evaluate the physical and chemical properties of rocks and their contained fluids. And we integrate geophysical information with production data to identify the most productive intervals, and to select well locations that offer the highest returns.

We perform focused data analytic studies to optimize horizontal well placement and well spacing decisions. To do this, we have a comprehensive database of industry wells with production, completion, reservoir, and operational data. We also use this data to optimize our completions for proppant loading, cluster spacing, and liquid loading.

During drilling operations, we use well and model data to make precise wellbore placement decisions to keep the well path within the most productive depth, often within a 10-foot interval.

Our integrated operations center provides support to our field personnel who have access to real-time operational data on mobile devices. As an example, real-time equipment information, such as excessive compressor vibration, can provide an early indication of a potential problem, allowing us to react before downtime occurs. But the real key in all this is effectively applying the technology to deliver better outcomes.

We also learn by watching others. The graphs on the right side are one example of how we successfully combine our application of technology with our learning from others. The initial six months' recoveries per lateral foot are highlighted on the charts for wells in two different benches. In red are the actual results of Competitor A, who is a strong growth player in the basin, employing a strategy of speed to the development of the 2nd Bone Spring and Avalon horizons in the Delaware basin. They got there first; they drilled aggressively in each horizon; and they demonstrated production growth. However, their strategy of trial and error required them to spend significant capital.

We've learned from their experience. The blue on the chart shows our actual results in the same horizons. For a similar number of wells, we're recovering more production per foot, and our cost per foot is lower than our competitors. Our strategy is working. We believe real value is created through capital efficiency and discipline, as well as strong, consistent execution.

Let's go to slide 13. This chart illustrates three elements of financial performance: our current financial metrics, the competitiveness of our current spend, and the attractiveness of returns for future investments.

First, our unconventional Permian business, fully loaded with overhead costs, has positive after-tax earnings for the first half of 2017. We forecast earnings growth even at flat prices in future periods as a result of lower unit operating costs and depreciation rates.

Our depreciation rates are expected to further decline as we cycle through prior invested capital and replace it with today's more efficient development costs. At actual 2017 oil, gas, and NGL prices, our year-to-date operating cash flow per barrel is approximately $20, and is accretive to Chevron's overall portfolio.

Second, our unit development and operating costs are competitive and declining. The chart on the right compares our Company-operated with our nonoperated JV costs. As you can see, cost reduction progress has been encouraging, and we are increasingly competitive.

And third, the Permian is an attractive place to make future investments. We estimate, as noted in the box at the bottom, that our 2017 investments in the Permian, fully loaded with overhead, will generate greater than 30% returns at a $50 a barrel WTI price.

Turning to slide 14. We're actively managing our Permian portfolio through acreage swaps, joint ventures, farm outs, and sales. This chart shows our historical and forecasted transaction activity in the Midland and Delaware Basins. We have identified between 150,000 and 200,000 acres in the Midland and Delaware Basins that we plan to transact to generate more immediate value. A recent transaction effectively more than tripled the value of our acreage, simply by enabling longer laterals.

Generally, the highest-value transactions are swaps to core up acreage and enhance value through long laterals and other infrastructure efficiencies. In 2017, we have already closed seven deals and have grouped the remaining acreage into a number of packages that are actively being marketed.

Slide 15. Production continues to track ahead of expectations as we continue to see efficiency gains and improved well performance. The chart on the left shows our second-quarter 2017 production of approximately 178,000 barrels a day, up about 44,000 barrels a day from the second quarter of 2016.

In March, we gave you our forecasted Permian compounded annual growth rate of 20% to 35%, and we're currently near the top of that range. Today we are operating 13 rigs and our plan is to continue to add rigs approximately every 8 to 10 weeks, achieving 20 operated rigs by the end of 2018.

In addition to our operated fleet, we expect to see our share of production from nonoperated rigs. Our objective in the Permian is to generate value through capital and execution efficiency. We intend to be fully competitive on our unit development and production costs and realizations, and use our superior royalty position to generate leading financial performance.

With that, I'll turn it back over to Pat.

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Pat Yarrington, Chevron Corporation - VP and CFO [4]

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All right. Turning now to slide 16. We continue to see lower capital spending as well as lower operating expense outlays despite significant production increases. C&E outlays have averaged $4.5 billion per quarter this year. That's over $1 billion lower than the average quarter in 2016, and over 50% lower than the average quarter in 2014. 2017 year-to-date total C&E is $8.9 billion. We are trending below our full-year guidance, and conservatively would expect full year C&E to come in around $19 billion.

A positive pattern is also evident with operating expenses. The average quarter this year is $5.6 billion, $650 million lower than the average quarter in 2016, and 25% lower than the average quarter back in 2014. We expect to close out 2017 with operating expenses $1.5 billion to $2 billion lower than 2016. Second-half costs will reflect growing production, the impact of asset sales, and continued cost-containment efforts throughout the enterprise.

Now on slide 17, we are on target with our asset sales program. In fact, we're already in the $5 billion to $10 billion proceeds range that we established for the 2016 and 2017 years. With six of the eight quarters behind us, cumulative asset sale proceeds now total $5.3 billion: $2.5 billion so far this year, and $2.8 billion last year.

During the remainder of 2017, we have a number of transactions that are listed on the slide where sales and purchase agreements are signed. We currently anticipate having at least $1 billion closing in the third quarter. Many of the remaining transactions are international in nature. These are often complex and subject to multiple regulatory agency oversight, making timing uncertain. When all is said and done, we expect 2016 to 2017 sales proceeds to be solidly within the established guidance range.

Now turning to slide 18, I would like to close out my comments this morning on cash flow. We have an improvement trend underway, with the first half of the year net cash positive, after dividends, by $1 billion. Production is up. In particular, high cash margin production is up, and capital spend is down. We're getting more efficient, and our cost structure is coming down. We're executing well on our asset sales, and we're realizing good value in those transactions.

We're also focused on improving returns. We expect this to happen as projects are completed and revenue is realized from growing production volumes. It will happen as we pivot to shorter-cycle-time, high-return investments. We showed you the opportunity we have in the Permian for high-return investments. And returns will be aided by ongoing reductions in operating expenses and improvements in how we manage our capital projects.

We are competitively positioned with a very strong portfolio. We are confident we're taking all the steps within our control to enhance our competitiveness longer-term.

So that concludes our prepared remarks. We're now ready to take your questions. Please keep in mind that we do have a full queue; and so try to limit yourself to one question and one follow-up, if necessary. And we'll certainly do our best to get all of your...


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