Chevron Corporation (NYSE:CVX) Barclays 2022 CEO Energy-Power Conference Call September 7, 2022 8:00 AM ET
Company Participants
Michael Wirth – Chairman and Chief Executive Officer
Conference Call Participants
Jeanine Wai – Barclays
Jeanine Wai
All right. Good morning, everyone. Thanks for joining us. We are very excited today to kick off the second and highest interest day of our 36 Annual Barkley CEO Energy-Power Conference with Mr. Mike Wirth, CEO of Chevron. Chevron is an integrated oil company. Whose goal is to look — its goal is to deliver high returns and lower carbon.
Before we start off the session, I thought it would be kind of fun little icebreaker today to start with two polling questions and then we’ll get into the fireside chat. So, everybody has a keypad at their seat. It’s been wiped off. There’s another hand wipe there, if you want to do it again. And we’ll be doing these ahead of every single session, and we’ll be publishing the results probably next week.
So our first question, please. What price do you think WTI will average in 2023? Press one for less than 70 for you bears out there. Two, 70 to 80; three, 80 to 90; four, 90 to 100; five, 100 to 110. And all you bulls press six as many times as you can for over a 100. We’ll pause for a couple seconds and then the results will pop up right away.
All right. Three to four. That’s better than yesterday. Yesterday, the majority of the people by far were 80 to 90. So, people are feeling more bulls today. I like it.
Okay. Next question, please. This is an interesting one. How much of a priority should the energy transition be for integrated oil companies only? Number one, top priority. Number two, medium priority. Number three, low priority. And number four, I see our ESG woman in the back. She wouldn’t like that, but not a priority. So top priority, medium, low, not a priority at all.
Okay. Medium priority. Sounds good. Yesterday we did — brought similar question on the — in an E&P session and it was how many — should it be necessary for E&Ps to have Scope 1 net zero and 75% of people said yes. So important topic.
With that, Mike, do you mind coming up here?
Michael Wirth
All right. Well, welcome to my world. Nobody knows what the price is going to be. And everybody’s got an opinion about how much ESG you should be involved in.
Jeanine Wai
All right. I wouldn’t be very good at my job if I can do this without it, but I prefer.
Michael Wirth
Okay.
Question-and-Answer Session
Q – Jeanine Wai
Okay. Well, thank you for joining us. I thought maybe we could start with the big announcement alongside Q2 earnings, which was the buyback. So, you increased the buyback from $5 billion to $10 billion to $5 billion to $15 billion. And in our view, Chevron is somewhat of a victim of your own success in that people were anticipating an increase given the really strong free cash show, and you already strong balance sheet that you don’t really need to repair like some other companies.
But I think the $15 billion on the top end, that still exceeded what our view of the market expectation was. So, that’s great. Can you walk us through the why now on the increase given there’s still a lot of volatility in commodity prices? And then how you really settled at the high end at $15 billion?
Michael Wirth
Sure. Well, Jeanine, you’ve been writing actually since last year, I think, kind of foreshadowing or anticipating this and I think we’ve been saying the same kinds of things. We’ve got strong cash generation in our business. We continue to be very disciplined on allocation of capital. The balance sheet is stronger than we’ve laid out our guidance for — through the cycle, net debt. And we’ve got a pretty strong macro look. It’s an uncertain look, for sure, if you want to try to predict prices in the next quarter, the next two quarters, but overall the fundamentals of the industry are pretty constructive, more so than we’ve seen in a long time.
And so, you put all that together. We run a lot of different scenarios and this is supported by multiple scenarios as we look at how we think our business could perform over time. And, of course, the key is we’re not really trying to time things with our share repurchase. We’re trying to stay with it through the cycle. We’ve got the cash generation and the balance sheet capacity to do so. So, it’s not really a — we don’t think of it as a procyclical or a countercyclical approach. It’s through the cycle approach that we want to be confident that, that we can sustain and we are.
Jeanine Wai
And so, you give investors an inch and they want a mile. So, the range that is through the cycle is $5 billion to $15 billion. How sustainable is the $15 billion? Is that really tied to a range in prices? I know you said it’s through the cycle, but how do you think about that $15 billion going forward?
Michael Wirth
Yeah. I mean, it’s a range. But if you go back to materials we put out during our Investor Day earlier this year, we showed a downside scenario at 50 and an upside scenario at 75, which at the time seemed like interesting scenarios to talk about. And at 75 we could sustain share purchases at a level like this for a number of years. We’re now obviously in a stronger position financially than we would’ve anticipated in that scenario. And I think it is — it’s very sustainable.
Now, if we were to see a strong downcycle and that were to extend for years. We’d probably use the range, but right now, we are — we ended last quarter at 8% net debt, third quarter is strong again. So, even as we’re buying shares back now at double the rate that is the highest ever — our highest ever share repurchase here was 2008, $8 billion. We’re now repurchasing at a rate of $15 billion. So essentially twice what the highest in our history is. And yet the balance sheet continues to be very strong. So, we’re confident we can sustain this for multiple years and through whatever downcycle may lie ahead.
Jeanine Wai
And so, you just mentioned that debt to cap is 8%, very low, lots of flexibility there on buybacks based dividends. When you think about the competitiveness of Chevron’s total return, what’s really the goal there. One management team was complaining to me other day that every note they see from the sell side has a bar chart on total returns. And if you’re on one side, you’re good; on the other side, you’re bad. So, for Chevron, how do you think about that is the goal to be number one top tier, or does that not really factor into calculus?
Michael Wirth
Well, we think about it. We — you always need to be competitive, but we really think about it within the framework of our four financial priorities, which we’ve long held. The first of which is sort of support and grow the dividend. We’ve grown our dividends 20% since the beginning of the pandemic when others in our industry have slashed their dividends. Our dividend is up 50% more than the S&P since the beginning of the pandemic. We’ve increased our dividend payout for 35 years in a row, and haven’t really cut it since the great depression. And over the last 15 years, we’ve grown it at a rate greater than the S&P and the payout’s about doubled the S&P payout right now. We’re 3.5 and the S&P not even half of that.
So, first of all is to protect the dividend. Second priority is to invest and grow our core business that generates the cash to support that dividend, which we can do in a more capital efficient manner than at any point during my 40 years. We can talk about that more if you like. The third is to maintain a strong balance sheet, and we just talked about that and then finally to return cash through share repurchases. So, we can satisfy all of those priorities. And we look at it in totality.
I’ve had discussions with shareholders as recently as this week and last week. And I’ve asked for input on, are there different ways that you think about this or different ways you want us to think about that? And the general response is, you’re predictable, you’re consistent, maybe even a little bit boring. But that in fact is differentiated in an industry that has seen wide swings in shareholder return behavior on the part of others in the sector.
Jeanine Wai
And as part of those feedback section sessions, does anything come up on the method of your cash return? Chevron chooses base dividends and buybacks. What about special dividends, variable dividends? Is there an appetite out there for your shareholders?
Michael Wirth
Well, we talk about it, because we’re always looking to understand the point of view and you hear different points of view from different shareholders. In general, our point of view has been that special dividends, variable dividends, something that’s got some sort of a twist to it, best fit those that don’t necessarily have a track record, like our track record. I just talked about three and a half decades of dividend increases, conservative balance sheet management, steady payouts. We’ve repurchase shares 15 of the last 19 years over — it’s $58 billion over that time at a price of about $90 a share relative to wherever we are today. And the price through that time is within a dollar or two of what had you been in the market every single day. So, we weren’t in the market every day, nearly every day.
So, we have a track record that I think is, that speaks strongly to what investors can expect. If you didn’t have that track record, and I don’t — there’s companies out there particularly maybe in the E&P sector that haven’t — I think we’ve got to come up with some sort of a framework to — for people to believe in and to try to buy into. I think ours is well established and I haven’t had anybody convince me that a different, or maybe kind of kind of a twist on that, makes it stronger. In fact, I’ve had some people tell me, look, if you guys started to offer some different thing, it would worry me that something’s changed. And so, I’ve had kind of the opposite reaction actually.
Jeanine Wai
Okay. And then I guess to support that track record, you need assets, you need a good balance sheet, you need cash as well. So, I just wanted to hit one last thing on this topic, which is the optimal cash balance. I think everything that’s happened over the past two-plus years has really shown that there’s a lot of volatility in the business. One thing that stands out to us is if we remember correctly, Chevron would like to hold maybe a little less cash going forward than historically, which is a little bit different from the U.S. competitor who wants to hold more cash going forward. Can you talk about your optimal cash balance?
Michael Wirth
Yeah. I mean, we only — we’ve got access to lots of cash if we need it for any sort of short-term pinch. Our — globally, our operating cash news are on the order of a $5 billion cash balance. And we can manage our business with that. We have more than that today because we’ve paid down all the debt that’s economic to paydown. And industry conditions have been strong as we’ve been talking about. And so, in the short-term that cash goes to the balance sheet. It’s not economically efficient to carry a lot of cash on the balance sheet. So, the intent is that over time that cash gets deployed consistent with the four priorities that I mentioned. It goes back in the form of dividends. It goes back in the form of share repurchases.
As we’ve said, our organic investment needs are pretty rateable and fixed. And so, it’s on the balance sheet now, because we don’t want to just try to time the market and push it all back at once. But the cash will go back to the shareholders by and large.
Jeanine Wai
Okay. Maybe moving to timing of the market and how that changes. We can switch to the macro. So, Chevron is built to not only with stand cycles, but to thrive through cycles, at least in our opinion. Given your global outreach — global reach, can you share your view on the macro, whatever it is right now? We think upstream capital is going to hold. And our recent investor conversation suggests that folks are really more focused on the demand side than on the supply side. I think the supply side, a lot of this discipline on the producer side. So, can you kind of talk about how current demand is trending? And how you’ve seen any reactions to price, especially since crude has gotten pretty weak since June?
Michael Wirth
Yeah. So, you really have to talk about these things in the context of recovery from the pandemic. Last year, demand was up, normally 5 million barrels a day; this year, another couple million barrels a day. So, we see strong underlying demand. There are certainly questions that I think people are appropriately asking about the effect of tightening in monetary policy and the risks that we see in Europe for sure. China, as well, had a very weak second quarter report. They’ve still got a lot of lockdowns underway.
And so, I think, in the short-term, there are questions about the durability of demand growth. We have seen, I would say, only modest softening in the U.S. for a fairly brief period of time as gasoline prices hit high levels in kind of May, June, July time period. But those data were not inconsistent with past recessions, went back and looked at, what similar data would suggest during past recessions. And so, I don’t want to get into the discussion, are we, or are we not? What’s the definition of a recession?
I just say, light duty transportation, fuel demand in the U.S. softened a little bit through the summer, but not in a way that would be, I would say, would be alarming. And, of course, we have other things that are likely over time to continue to support demand growth, particularly China can’t stay locked down forever. So, we’ll see how that plays out maybe after the party Congress in October. And certainly international air travel continues to be constrained by, in many cases, pilots and baggage handlers and the workforce. Demand seems to be there, but the capacity of the industry is adjusting. And so, we continue to believe that we’re going to see pretty good demand growth going forward. And I think your comment about discipline on the spending, on the supply side is consistent with everything that I hear from people that I talk to.
Jeanine Wai
Okay. Great. So, now that we have the macro stage set, maybe we can turn to how Chevron specifically is navigating through it. We know that you take a multi-year view in your planning cycle. You’ve committed to $15 billion to $17 billion as your medium term range, about 3% or more. CAGR is associated with that. What would really cause you to skew to either the high end or the low end of your CapEx range?
Michael Wirth
Yeah. So, this year went to low end, we’re at 15. And that’s for organic. We’ve done an inorganic transition this year, which — or transaction, which you don’t plan for, because you’re not sure if those are going to come up or not. But our organic spend is at 15, that’s coming up from less than 12 last year during the pandemic. And look, we can — our goal is not to hit a certain capital number or to hit a certain production number, it’s to improve returns. And so all of our optimization is driven towards return on capital. It’s a capital intensive business. The production number is an outcome of that. And it just so happens. We’re delivering a 3% compound annual growth rate over the next five years at that investment level.
And so, when I talk to investors, I say, would you view us as differently as an investment? If we said, well, we’re going to grow faster, we’re going to spend more capital. We’re going to go to 20 or 22 or 20, pick a number and grow at 5% or 6%. And almost universally the reaction is, that doesn’t make you a better investment, that may make you a riskier investment. That’s what I don’t trust about this industry is that you will remain disciplined and focus on returns. We’re afraid you’re going to chase the returns out of the business in the pursuit of growth.
And I think people are also very familiar with the fact they’re very real constraints in terms of execution right now. There are limitations in the service sector. There’s limitations on equipment. Inflation is alive and well in our sector, as well as other sectors of the economy. And so, the — feeding more capital into an inflationary environment generally is something that the feedback I’ve received is people don’t think that would be a wise move. So, we can deliver strong improvement in financial performance. We can meet our lower carbon milestones and trajectories, deliver improved returns, sustain the financial performance, I talked about earlier at that capital range. And it allows us to be — to plan our work and work our plans so we can really execute, because we’ve got a very consistent view on how the work lines out well into the future.
Jeanine Wai
And then, energy security, it’s really front and center these days. How does Chevron strike the right balance between providing the world with affordable, reliable energy that it needs? We’re trying to get through the low carbon initiatives. And I guess, in particular we have in mind, has the social license to operate. Has it gone too far in the sector or for Chevron? And how do you respond when critics say that you could be benefiting from perhaps putting a little bit more capital in there?
Michael Wirth
Well, look, we’re a long-term business. We’ve been around for 143 years. I sometimes tell people we were doing ESG before anybody heard of the letters, because as a responsible company — I can go back and show you a hundred years ago, I keep things on my desk that are pulled out of our archives that talk about protecting the environment, protecting our workforce, that talk about a 40-hour work week, that talk about the value of investing in communities and community relationships, that talk about good governance. And so, I look at all of these as how a well run company approaches their business.
Yes, we have a fiduciary responsibility to create value. You got to do that because you’re a good neighbor. You’re welcome in the communities where you want to operate. You have business model that attracts talented people and your governance processes that identify and manage risk very well. And so, that’s all part of how you approach running a business that can endure for nearly century and a half. And so to me, those are actually conversations that I welcome because it’s really in the DNA of our company.
Jeanine Wai
Okay. Great. You know what we had to ask. So maybe switching to LNG topic du jour for a long time now, maybe we can talk about EG expansion opportunities there. You have a lot of opportunities. We know that the Eastern Med is the crown jeweler portfolio. You recently FID, a small project, offshore Angola to help feed the plant there, you have that nice, but relatively small position in EG. And there’s an LNG plant there. Are there opportunities in the portfolio on the LNG side that maybe aren’t as on people’s radars?
Michael Wirth
Well, so we’ve built our LNG business up over the last decade and a half with a Pacific basin focus. That’s where the demand has historically been is where the big customers have been. It’s where our resource position has been the strongest. And so, we’ve had some exposure to the Atlantic basin through Angola, now through EG and in the Eastern Mediterranean, but the real core was built out for the Pacific basin. Historically, in Atlantic basin to compete in Europe, you had to compete with Russian pipe gas and Russian pipe gas winds as long as it’s flowing. And, of course, now, things have changed. And I think there’s different views on how much of this is a sustained structural change. How much of it may be a temporary change where many things land. I’m not sure anybody knows the answer to that, including leaders in Europe right now.
But to think that we would go back to a market that looks like it did two years ago, that’s probably a low likelihood that, everybody just says, okay, let’s go back to that model. So, I think you’re going to find the Atlantic basins a more attractive destination, and I think Europe’s going to need LNG in the mix in a way that historically they may not have.
We’ve got some assets, as you say, in Angola, in Equatorial Guinea. We’ve signed two agreements here in the U.S. to — throughput we lot of gas production here. That’s got Henry Hub price exposure, lot of projects being developed and need financing. We can support that with contracts and get pretty good terms and add some TTF exposure to our portfolio, potentially JKM anyway, convert the Henry Hub price, exposure to another index. We can manage that through the way we structure contracts and manage our portfolio. So, some of that gas can go into Europe.
And then, the Noble position in the Eastern Mediterranean really is good, better than we had even known when we did the transaction. And there are opportunities for expansion there that can serve both regional markets in the Middle East and potentially serve Europe probably through liquified natural gas, but there’s talk about a pipeline as well. And so, we’re working on all of those options, but they’ve got to deliver returns. So, I’ll come back to that core message, which drives all of our capital allocation.
We stepped away from a project in British Columbia, the Kitimat project that we’ve been working on for a number of years, because we didn’t believe it would offer returns competitive with other sources of gas and investment that we could make. We didn’t see a way all the way through the project — the process in Qatar again, because we felt like we had higher return opportunities to invest in other assets in our portfolio. And so, these projects have to deliver returns to shareholders, not just product to market. They’ve got to do both.
Jeanine Wai
And so you didn’t mention the Haynesville. So, we know that you’re putting rigs back to work in the Haynesville. You’ve got a very nice, strong Permian position. Is there an updated view on the U.S. natural gas strategy? You talked about the contracting you did on the 4 million tons an annum. What about monetizing the U.S. gas?
Michael Wirth
Well, that is — that will be one of the vehicles for doing that. We are putting rigs to work in the Haynesville. We’ve got a very strong position there. It’s approximate to — particularly to one of the two LNG facilities that we’ve talked about. And gas prices, whether you’re talking to Henry Hub or LNG, indicate support for some additional development drilling. So, this is an asset we’ve had. We’ve been assessing for a long time. And again, within the disciplined allocation of capital, it competes with other things. And so, we’ll step up some activity there.
Jeanine Wai
Okay. We’re interested in seeing how that goes. Maybe in our last couple of minutes here, energy security, Kazakhstan, CPC, maybe we could spend a minute or two talking about that. CPC has been in the news. There’s some repair work that’s going on right now. Just maybe your latest on what the current status is there. And what potentially are some of the other alternative routes to get some of the crude out?
Michael Wirth
Safe. So, we have a big position in Kazakhstan. The primary export route for the country for multiple oilfields through the Caspian Pipeline Consortium. Right now, there are three loading buoys in the Black Sea at a port called Novorossiysk in Russia. So, the pipeline transits through Russia to a port and then loads out. Two of the three mooring positions are not in service right now, because of concerns about the integrity of the buoyancy systems associated with those and repairs are being advanced to both of them. Through the one — the third SPM, about 70% of pipeline capacity can be loaded out, so about 1 million barrels a day. There are no constraints right now on loading because all three of the projects actually have maintenance, either planned or unplanned maintenance underway. And so, the pipeline flows can be handled through that one buoy as the other two are — the repair work is being planned for execution. So, we’ll continue to monitor that and advise as we know.
In terms of alternates, this is a big pipeline that carries a lot of oil every day. There’s not investments been made in a bunch of other alternatives. There are ways to do it. We’ve used railcars before. It can be done. It costs a little bit more, but for many years, we’ve shipped a lot of oil via rail out of that area. The country of Kazakhstan has indicated the desire to evaluate some other options, including getting across the Caspian into Baku and Azerbaijan and potentially one of a couple of different pipeline routes out there. So, we’ll work with the government to explore things that they believe are worthy. But the reality is in the near-term, the primary and the large scale option remains this pipeline.
Jeanine Wai
All right. In our last minute, I’d like to end on M&A. We get a lot of questions from investors, what are they going to do with all the money? Disciplined on the investment side, balance sheet is good, total return is very strong for investors, so that leaves M&A. How do you evaluate the opportunity set, both on — maybe the organic and inorganic side, but mainly on the inorganic side with the low carbon ventures? You announced the REGI deal. That was relatively small for Chevron’s size. And how do you evaluate the framework? How is it different between maybe the base business M&A and then on the low carbon side?
Michael Wirth
Well, at one level, they’re no different at all. We screen a large universe of companies against a set of criteria that include asset quality, strategic fit, financial performance of the company, where they are in valuation and willing to transact, et cetera. So, the way you actually go through the process is no different. The reality is there are a couple of things that are different with some of these newer energy opportunities. One is they tend to be smaller just because they’re newer and they haven’t scaled. So, the price tag is less. And I think the risk is higher because they really haven’t been proven out yet. And so, you have to account for both of those as you evaluate these things.
REGI was a mature business in their field. We’re the second largest renewable and biodiesel producer in the U.S. now. And that’s a business model that had been proven. They’ve got some nice expansion projects that were underway. So, you can find things that have less risk. But in general, I’d say smaller bets, higher risk, and we need to be mindful of both of those and remain disciplined. I mean that’s the key thing for us is. We don’t have to do anything. We’ve got a very strong portfolio today, and we should only do deals that we think make our company even stronger.
End of Q&A
Jeanine Wai
All right. Well, we’re out of time. I’ve got to admit, this has been a real pleasure and a real treat. Thank you, Mike.
Michael Wirth
Thank you, Jeanine.
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