Chevron Corporation (NYSE:CVX) Q1 2024 Earnings Call Transcript

Chevron Corporation (NYSE:CVX) Q1 2024 Earnings Call Transcript April 26, 2024

Chevron Corporation beats earnings expectations. Reported EPS is $2.93, expectations were $2.84. Chevron Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. My name is Katie, and I will be your conference facilitator today. Welcome to Chevron’s First Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I will now turn the conference call over to the General Manager of Investor Relations of Chevron Corporation, Mr. Jake Spiering. Please go ahead.

Jake Spiering: Thank you, Katie. Welcome to Chevron’s First Quarter 2024 Earnings Conference Call and Webcast. I’m Jake Spiering, General Manager of Investor Relations. Our Chairman and CEO, Mike Wirth, and CFO, Eimear Bonner, are on the call with me today. We will refer to the slides and prepared remarks that are available on Chevron’s website. Before we begin, please be reminded that this presentation contains estimates, projections and other forward-looking statements. Reconciliation of non-GAAP measures can be found in the appendix of this presentation. Please review the cautionary statement on Slide 2. Now I’ll turn it over to Mike.

Mike Wirth: Thanks, Jake, and thank you, everyone, for joining us today. Chevron continues to deliver strong operational performance, maintain cost and capital discipline and consistently return cash to shareholders. First quarter marked 9 consecutive quarters with adjusted earnings over $5 billion and adjusted ROCE above 12%. During the quarter, we also returned $6 billion in cash to shareholders, the eighth straight quarter over $5 billion. We also grew production more than 10% from the same quarter last year and announced final investment decisions to grow our renewable fuels and hydrogen businesses. Earlier this month, we announced our third Future Energy Fund focused on venture investments in lower-carbon technologies. The merger with Hess is advancing, and we intend to certify substantial compliance with the FTC second request in the coming weeks.

We believe that a preemption right does not apply to this transaction and are confident this will be affirmed in arbitration. We expect the proxy for the Hess shareholder vote to be mailed in April with a special meeting date in late May. This strategic combination creates a premier energy company with world-class capabilities and assets to deliver superior shareholder value, and we look forward to bringing the two companies together. At TCO, we had achieved start-up of WPMP this month, with the first inlet separator and pressure boost compressor in service and conversion of the first metering station to low pressure now complete. Later this quarter, we expect a second pressure boost compressor online and a third gas turbine generator to provide power to the Tengiz grid.

Metering station conversions are planned through the remainder of the year as additional pressure boost compressors start up, keeping the existing plants full around planned SGI and KTL turnarounds. We continue to make significant progress on FGP and expect to have additional major equipment ready for operations in the third quarter. Costs and scheduled guidance remain unchanged with FGP expected to start up in the first half of 2025. Now over to Eimear to discuss the financials.

Eimear Bonner: Thanks, Mike. We delivered another quarter of strong earnings, ROCE and cash returns to shareholders. We reported first quarter earnings of $5.5 billion or $2.97 per share. Adjusted earnings were $5.4 billion or $2.93 per share. Cash flow from operations was impacted by an approximate $300 million international upstream ARO settlement payment and $200 million for the expansion of the retail marketing network. We also had a working capital build during the quarter consistent with historical trends. Chevron delivered on all of its financial priorities during the quarter, an 8% increase in dividend per share. Organic CapEx aligned with ratable budget inclusive of progress payments for new LNG ships. [Indiscernible] net debt in the single digits while issuing commercial paper to manage timing of affiliate dividends and working capital and share repurchases of $3 billion.

Adjusted earnings were lower by $1 billion versus last quarter. Adjusted upstream earnings were down due to lower realization and liquid liftings, partly offsetting were favorable tax impacts. Adjusted downstream earnings were lower mainly due to timing effects associated with the rising commodity price environment. All other decreased on higher employee costs and an unfavorable swing in tax items. Adjusted first quarter earnings were down $1.3 billion versus last year. Adjusted upstream earnings were down modestly. Higher liftings were more than offset by lower natural gas realizations. DD&A was higher due to the PDC acquisition and Permian growth. Adjusted downstream earnings were lower mainly due to lower refining margins and timing effects.

Worldwide oil equivalent production was the highest first quarter in our company’s history. Production was up over 12% from last year, including an increase of 35% in the United States largely due to the PDC Energy acquisition and organic growth in the Permian Basin. Looking ahead to the second quarter, we have planned turnarounds at TCO and several Gulf of Mexico assets. Following another strong quarter in the Permian, production is trending better than our previous guidance, and we now expect first half production to be down less than 2% from the fourth quarter. Impacts from refinery turnarounds are mostly driven by El Segundo and Richmond. We anticipate higher affiliate dividend in the second quarter largely from TCO. With the start-up of WPMP, we expect TCO’s DD&A to increase by approximately $400 million over the remainder of the year.

Share repurchases are restricted under SEC regulations through the Hess shareholder vote, after which we intend to resume buybacks at the $17.5 billion annual rate. We’ve published a new document with our consolidated guidance and sensitivities that will be updated quarterly and posted to our website the month prior to our earnings call. Back to you, Jake.

Jake Spiering: 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. Katie, please open the line.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Sam Margolin with Wolfe Research.

Sam Margolin: Maybe we could start with Tengiz because there’s movement there. And specifically, the effects of the WPMP start-up, if you don’t mind going into some detail. I think the market understands that it’s FGP phase that really rerates kind of TCO’s distribution capacity. But if there’s any incremental benefits from WPMP starting up, whether it’s reliability or potential to produce over nameplate or even just the CapEx run rate and what it means for maybe an annualized TCO distribution at this stage, that would be very helpful. Thank you.

Mike Wirth: Yes. Sam, let me talk a little bit to the project and operational dimensions of this, and then I’ll let Eimear comment on the financial ramifications of that. So look, we’re really pleased with the progress that’s been making and pleased that we’ve begun the initial start-up of WPMP with the first PBF compressor online and processing crude through the plants after conversion of the first metering station. It’s an important milestone. I’m proud of the team and the work they’ve been doing. They’ve done this safely. We’re seeing initial operation that is well aligned with our expectations. In fact, we’ve been encouraged by very strong production response from the wells that feed into this first metering station. We now have the second metering station planned for conversion is off-line, and that conversion is underway.

And as we bring on more of the PBF compression capacity, we’ll complete more metering stations over the balance of the year. What happens here is, we get higher production because the wells are now flowing against lower back pressure. And as I said, Sam, we’ve seen really strong response on this first set of wells. What that does is it gives us a high degree of confidence in keeping the plants full all year long with the fact being that we’ve got some turnarounds we have to do. We’ve got an SGI turnaround and a KTL turnaround, SGI this quarter, KTL next quarter, to do some tie-ins and some other normal maintenance. But in the periods in between those, it increases deliverability and the confidence of the plant will be full throughout that period of time.

We’ve got a lot of project scope operational is the other thing that I just would remind you of. We’re producing from new wells. We’ve got upgraded to new utilities now, gathering system, a new control center, power distribution system, two new, big-frame nine gas turbine generators in service. So the reliability of the infrastructure and all of the control networks and everything is significantly improved as we got more modern equipment in place. So all of this reads through to higher degree of reliability, strong production performance. And last year was the second strongest year in the past several. So it gives us high confidence in delivering what we’ve said we’ll deliver there. And then as we get into the third quarter, we’ll start commissioning some of the process equipment as part of FGP, which, as you say, first half start-up next year is when you see the incremental production come online.

So good progress all the way around. I’ll reiterate that schedule and cost guidance are unchanged. And we’ll continue to provide details each quarter on milestones and progress as we proceed. Eimear, maybe you can just talk about what that means financially.

Eimear Bonner: Yes. Thanks, Mike. Yes, Sam, after years of investing, as the project starts up over the next couple of years, we do expect the CapEx profile to continue to decline, and that will enable free cash flow over the next couple of years to grow. With WPMP, it will keep the plants full. So this will allow IBS business to generate significant cash, and that will be available for distribution. With the second phase of the project then next year in ’25, TCOs free cash flow is going to grow even further because with that phase of the project, we get incremental production. So what does this mean for Chevron? Well, we expect $4 billion of free cash flow in 2025 and $5 billion in 2026. This is a $60 Brent. This will flow to us through a combination of dividends, so you’ll see this come through cash flow from operations and loan repayments, which will flow through cash for investing.

So we do expect dividends this year. We have affiliate guidance to dividends for 2024. But we’ve also included in the deck today the outlook for affiliate dividends for the second quarter, $1 billion to $1.5 billion. And a significant portion of that is an assumption around TCO.

Operator: We’ll go next to Neil Mehta with Goldman Sachs.

Neil Mehta: My question is really on the exploration program. Specifically, you have an interesting position in West Africa and Namibia. So maybe you can just give us some historical context of how you got involved here. Is this an asset that you see a lot of opportunity in, especially given some of the announcements from peers over the last couple of weeks? And how do you think about prosecuting it going forward? Thank you.

Mike Wirth: Yes. Thank you, Neil. We’ve got a nice portfolio of exploration opportunities around the world and including numerous prospects on Block 90 in the Orange Basin offshore Namibia, which lies just outbound of where there was a recent discovery announced by another company. We’re planning to spud the first exploration well in that block late this year or early next year based on rig availability. The rig will be completed in early ’25. We farmed into another block, Block 82, which is further north in the [indiscernible] basin, and that was just announced earlier this week. And as you know, there have been a number of discoveries made by companies in the Orange Basin. Our block is on trend with those discoveries. We’re encouraged by the success we see from others.

And this is certainly an area where the industry has had a good batting average, a high degree of success. And we’re pleased that we’ve got two blocks now offshore Namibia. And of course, we’ll talk to you more as we get into the exploration program there.

Operator: We’ll go next to Paul Cheng with Scotiabank.

Paul Cheng: You guys did a small deal look like on the retail marketing asset, adding over 200 stations in the Gulf Coast and West Coast. I actually don’t remember. I think since you’ve been the head of downstream, say, call it, 20 years ago, you guys have been selling out of there. So is there a change of your view in terms of the overall strategy we need to that part of the business? And whether that this deal you are going to be owning the asset or that this is wholesale marketing drop network type of deals that you are acquiring? Thank you.

Mike Wirth: Yes. Thank you, Paul. As you know, I come out of that part of the business. I love talking about retail. Look, we’ve got 3 really strong brands around the world: Caltex internationally in Asia, primarily Middle East and Africa a little bit, Chevron and Texaco here, primarily in the Americas. And you’re right, we only own about 5% in the U.S., even less than 5% of our branded stations. So most of our business is done through large retailers and distributors. We enter into agreements of supply agreements and branding agreements with these marketers. And there are times, different mechanisms we use to support their investments. We’ve done a couple of deals here in the last quarter that are substantial to add a few hundred stations to our network.

And as part of that, we advanced some cash to support their brand conversion efforts, their investment in the network and to solidify our relationship with really important customers of ours that ultimately sell on to consumers. And so you saw that consume some cash. It technically from an accounting standpoint doesn’t get classified as capital, but we want to disclose it because it is cash. And it helps us grow our branded sales. And so it’s an important part of our business. We’re doing these kinds of deals all the time. Paul, there tend to be oftentimes smaller magnitude, so they don’t necessarily get to a size where we would mention it the way that we did today. But we won’t own these stations. They’re owned by really strong independent retailers.

Thanks for the question.

Operator: We’ll go next to Betty Jiang with Barclays.

Betty Jiang: Mike, we’re seeing that the U.S. operations look pretty strong quarter, especially with Permian holding in better than expected relative to your expectations. Could you just talk about what drove the better performance in the Permian and how you think the rest of the year unfolds? And then just anything else within the U.S. that you want to highlight?

Mike Wirth: Sure. So yes, first quarter production in the Permian was good, 859,000 barrels a day, down about 1% from the fourth quarter of last year, stronger than what we had anticipated. Really good, strong performance in our company-operated business, building off the momentum from the fourth quarter of last year. We have seen reliability improvements that translate into a slightly less decline in our base production. We saw a significantly shorter frac to POP cycle time, so between recompleted frac and when we put it on production. So that resulted in a few more wells being POPed in the first quarter, which you see in the production. Well performance itself was generally aligned with our expectations. And so we’ve been talking a lot about type curves the last few quarters.

We’re seeing strong performance that’s aligned with or even a little bit stronger than what we expected. And then we also saw some good contributions from our royalty acreage, which is the highest-return barrels we have because we really have no investment there and it’s attractive acreage. Others are developing it. And we saw increased activity that resulted in increased royalty production. NOJV, right on plan with what we expected and a lot of visibility into the non-operated joint venture portfolio for this year, more even than last year at this time, and confidence that, that will deliver. So all of that translated into a very strong first quarter. Eimear mentioned that we now expect our first half to be better than we’d previously guided.

We said 2% to 4% down versus fourth quarter of last year. We now think we’ll be less than 2% down. And then, of course, the back half of the year, we had another frac spread. We’ve got more wells online and expect to exit the year around 900,000 barrels a day. So really strong performance there and consistent with the momentum that you’ve seen in prior quarters. I guess the other thing I would mention relative to the U.S. more broadly is the Anchor project in the deepwater Gulf of Mexico is we’ve guided towards midyear start-up of that. It’s right on track. The floating production unit is being commissioned as we speak. We’ve got both buyback gas and back oil in the facilities. So that means the pipelines, the process units are now charged with live hydrocarbons.

We’re commissioning some of the subsea infrastructure, including flow line. The completion of the first well is in progress. Second well is drilled and will be completed shortly. Third well is being drilled right now. So we’ll talk more about this, but everything is right on track for start-up of Anchor midyear. And then, of course, we’ve got other Gulf of Mexico projects as well that are kind of stacked up right behind Anchor over subsequent quarters. So the outlook in the U.S. is especially strong.

Operator: We’ll go next to Josh Silverstein with UBS.

Josh Silverstein: You add around $1 billion of debt this quarter to manage some of the working capital and really distribution timing. Do you think that the cash balance growing sequentially? Do you repay the commercial paper in 2Q? Just wanted to get a sense of where the cash outlook may go sequentially. Thanks.

Mike Wirth: Eimear, why don’t you take that?

Eimear Bonner: Yes. Josh, yes, so we had some commercial paper issued in the first quarter, and it was just to manage short-term liquidity. Timing of affiliate dividends can be a bit lumpy, repatriation of cash can be a bit lumpy. So this was normal business for us in the first quarter. I think in terms of what to expect in terms of cash on the balance sheet, I mean, we target to hold about $5 billion in cash, and that will bounce around as well. But I think $5 billion is a good number. We have access to lots of liquidity and commercial paper, bond investors, credit facilities. So while we’ve had higher cash in the balance sheet in the past, holding excess cash with low debt and lots of access to liquidity can be a drag in returns. So we’re quite comfortable with the $5 billion cash, and that’s a good number for you to focus on their clients.

Operator: We’ll go next to Biraj Borkhataria with RBC.

Biraj Borkhataria: I wanted to ask a follow-up on the Permian. So you put out the updated the well productivity side, which is very helpful. But a few quarters ago, Mike, you talked about some of the broader constraints in the Permian, whether it’s CO2, water handling and so on. It doesn’t look like it’s impacted your volumes in the near term, which have performed very well. So could you just refresh us on if anything has changed in your views on that there?

Mike Wirth: Yes. Thanks, Biraj. Nothing’s really changed. I mean this is a very large base business now with thousands of wells over a very large footprint. And it’s important that we focus not only on productivity, efficiency and reliability and drilling and completions, but also in all aspects of operations. And that’s midstream takeaway, it’s gas processing, it’s water handling. And we’ve got more development underway this year in the New Mexico portion of the Delaware, which is going to require a build-out of some of this capability, which will be part of our capital program addresses. But you really have to stay on top of base business reliability on all these things. Seismic is another one we’ve seen some issues on. And so they’re all part of managing the business for safety and reliability each and every day.