Chevron Corporation (NYSE:CVX) Q4 2022 Earnings Call Transcript

Chevron Corporation (NYSE:CVX) Q4 2022 Earnings Call Transcript January 27, 2023

Operator: Good morning. My name is Katie, and I will be your conference facilitator today. Welcome to Chevron’s Fourth Quarter 2022 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 is being recorded. I will now turn the conference over to the General Manager of Investor Relations of Chevron Corporation, Mr. Roderick Green. Please, go ahead.

Roderick Green: Thank you, Katie. Welcome to Chevron’s fourth quarter 2022 earnings conference call and webcast. I’m Roderick Green, General Manager of Investor Relations. Our Chairman and CEO, Mike Wirth; and CFO, Pierre Breber, are on the call with me. Also listening in today is Jake Spiering, the incoming General Manager of Investor Relations, who will assume this position effective March 1. Jake and I will be transitioning together over the next couple of months. It’s been my sincere pleasure working with each of you over the last two years. Thank you for your questions, feedback and investment in Chevron. 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. Please review the cautionary statement on slide two. Now, I will turn it over to Mike.

Mike Wirth: Thank you, Roderick, and thanks, everyone, for joining us today. Chevron had an outstanding year in 2022, delivering record financial performance, producing more traditional energy and advancing lower carbon businesses. Free cash flow stood a record, beating our previous high in 2021 by more than $15 billion, enabling a strong dividend increase and the buyback of almost 4% of our shares. US production was also our highest ever, led by double-digit growth in the Permian. Growth matters when it’s profitable. Return on capital employed over 20% shows that our focus on capital efficiency is delivering results. And we took important steps in building new energy businesses. We successfully integrated REG’s people and assets into Chevron, combining the best of both companies’ technical and commercial capabilities.

And we acquired rights to pore space for potential carbon capture and storage projects in Texas and Australia. We had many other highlights last year, to name just a few, at TCO, project construction is largely complete, and we’re starting up the fuel gas system. Focus is on commissioning and start-up of the Wellhead Pressure Management Project by the end of this year, to begin transition of the field from high to low pressure. We announced a significant new gas discovery offshore Egypt, which could build on our growing natural gas position in the Eastern Med. And our affiliate CPChem reached FID for two world-scale ethylene and derivative projects in Texas and Qatar. 2022 was a dynamic year, with unique macroeconomic and geopolitical forces disrupting economies and industries around the globe.

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These events remind us of the importance of affordable and reliable energy with a lower carbon intensity over time. We don’t know what’s ahead in 2023. I do know that Chevron’s approach will be clear and consistent, focused on capital, cost and operational discipline, with the objective to safely deliver higher returns and lower carbon. With that, I’ll turn it over to Pierre to discuss our financials.

Pierre Breber: Thanks, Mike. We reported fourth quarter earnings of $6.4 billion or $3.33 per share. Adjusted earnings were $7.9 billion or $4.09 per share. Included in the quarter were $1.1 billion in write-offs and impairments in our international upstream segment, and negative foreign currency effects over $400 million. A reconciliation of non-GAAP measures can be found in the appendix to this presentation. Record operating cash flows in combination with continued capital efficiency, resulted in over $37 billion of free cash flow in 2022. The only other year Chevron’s operating cash flow exceeded $40 billion was 2011. Free cash flow in that year was less than 40% and of this year’s record. In 2022, Chevron delivered outstanding results on all four of its financial priorities.

Announcing earlier this week another 6% increase in our dividend per share, positioning 2023 to be the 36th consecutive year with annual dividend payout increases, investing within its organic budget despite cost inflation. Inorganic CapEx totaled $1.3 billion nearly 80% for new energy investments. Paying down debt in every quarter and ending the year with a 3% net debt ratio, returning record annual cash to shareholders through buybacks and exiting the year with an annual repurchase rate of $15 billion. Two days ago, Chevron’s Board of Directors authorized a new $75 billion share repurchase program. Now is a good time to look back on our execution of the prior programs. Over the past nearly two decades, we bought back shares in more than three out of every four years, returning more than $65 billion to shareholders.

And we’ve done it below the market average price during the whole time period. Going forward with the new program, our intent is the same, be a steady buyer of our shares across commodity cycles. With a breakeven Brent price around $50 per barrel to cover our CapEx and dividend and with excess balance sheet capacity, we’re positioned to return more cash to shareholders in any reasonable oil price scenario. Turning to the quarter. Adjusted earnings were down nearly $3 billion compared with last quarter. Adjusted upstream earnings decreased primarily on lower realizations and liftings as well as higher exploration expense, partially offset by favorable timing effects. Adjusted downstream earnings decreased primarily on lower refining and chemicals margins and negative timing effects partially offset with higher sales volumes following third quarter turnarounds.

The Other segment charges increased mainly due to accruals for stock-based compensation. For the full year, adjusted earnings increased more than $20 billion compared to the prior year. Adjusted upstream earnings were up primarily due to increased realizations. Other items include higher exploration expenses, higher incremental royalties and production taxes due to higher prices, partially offset by favorable tax benefits and other items. Downstream adjusted earnings increased primarily due to higher refining margins, partially offset by lower chemical earnings and higher maintenance and turnaround costs. 2022 production was in line with guidance after adjusting for higher prices. As a reminder, Chevron’s share of production is lower under certain international contracts when actual prices are higher than assumed in our guidance.

Reserves replacement ratio was nearly 100% with the largest net additions in the Permian, Israel, Canada and the Gulf of Mexico. Higher prices lowered our share of proved reserves by over 100 million barrels of oil equivalent. 2023 production is expected to be flat to up 3% at $80 Brent. After adjusting for lower prices and portfolio changes, primarily the sale of our Eagle Ford asset and the expiration of a contract in Thailand, we expect production to grow led by the Permian and other shale and tight assets. We remain confident in exceeding our long-term production guidance. Looking ahead to 2023, I’ll call out a few items. Earnings estimates from first quarter refinery turnarounds are mostly driven by El Segundo. Based on the current outlook, we expect higher natural gas costs for our California refineries.

Full year guidance for all other segment losses is lower this year due to higher expected interest income and again excludes special items such as pension settlement costs. The All Other segment can vary quarter-to-quarter and year-to-year. We estimate annual affiliate dividends between $5 billion and $6 billion, depending primarily on commodity prices and margins. The difference between affiliate earnings and dividends is expected to be less than $2 billion. We do not expect a dividend from TCO in the first quarter. We updated our earnings sensitivities. About 20% of the Brent sensitivity relates to oil-linked LNG sales. Also, we expect to maintain share buybacks at the top end of our guidance range during the first quarter. Finally, as a reminder in Venezuela, we use cost affiliate accounting, which means we will only record earnings, if we receive cash.

We do not record production or reserves. 2022 was a record year for Chevron in many ways. We look forward to the future, confident in our strategy with a consistent objective to safely deliver higher returns and lower carbon. We’ll share more during our Investor Day next month. Back to you, Roderick.

Roderick Green: That concludes our prepared remarks. We are now ready to take your questions. Please try to limit yourself to one question and one follow-up. We’ll do our best to get all your questions answered. Katie, please open the lines.

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Q&A Session

Operator: Thank you. Our first question comes from Jeanine Wai with Barclays.

Jeanine Wai: Hi. Good morning, everyone. Thanks for taking our questions.

Mike Wirth: Good morning, Jeanine.

Jeanine Wai: Before we get started €“ hi, good morning, Mike. We’d like to wish Roderick well in his new position, and we really appreciate all your time and help over the past two years. So thank you very much. Our first question, maybe just heading towards the buyback authorization topic. This week, the Board authorized the buyback authorization up to $75 billion, no expiration date, which is pretty large versus the prior authorization that had a four-year expiration date. We heard your comments on wanting to be a steady buyer of your shares across cycles and that you’re positioned to return more cash to shareholders. Can you comment on the decision-making process for getting to that $75 billion and maybe the choice to leave the authorization open in timing versus the prior authorization did have an expiration date?

Mike Wirth: Yeah, Jeanine, let me start, and then I’ll have Pierre add a little bit of color. We included a little information on this call looking back at our past programs. And as you saw on the slide 15 of the last 19 years, we’ve bought shares back lower than the market volume weighted average over that period of time. We look at the decision going forward in the context of the cash-generating potential of the portfolio, the outlook for the market environment, the strength of the balance sheet. And we don’t want to be authorizing a program every year. So, we talk to the Board about a multiyear outlook. So, the fact that there’s not an end date on it is only significant if you’re trying to do some sort of math and annualize this.

We think our track record speaks for ourselves and the steady, consistent way that we’ve done this. And so, we increased the rate three times last year as we saw the situation evolve, and we’re now at an all-time high with the rate of repurchases. So, the last thing you said it, but I’ll repeat it, in sized to maintain our program through the commodity cycle. We aren’t pro-cyclical. We’re not countercyclical. We’re steady through the cycle, and that is the intention. Pierre, do you want to add anything?

Pierre Breber: Yes, Jeanine. So, the authorization from 2019 was going to be consumed in the second quarter. It was also open. So, it did not have a defined time period. We just — will have consumed it. So, instead of having an authorization in the middle of the quarter, we’ll complete this quarter’s buybacks under the 2019 authorization, which again had an open time period, and then we’ll start the new on April 1st. So, it is similar the way it was done in the prior time.

Jeanine Wai: Thank you for that clarification. We appreciate that. Maybe our second question, it’s that time of year again, reserve replacement ratio, your ratio for 2022 was 97%. And we believe that compared to 112% last year, and then I think it was around 99% on average for the five years before that. So, our question for you is just — how do you see this ratio trending over time? And I guess the over or under bogey is probably 100%. Thank you.