Chevron - Q2 2023

Transcript

Operator (participant)

Good morning. My name is Katie. I will be your conference facilitator today. Welcome to Chevron's Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's remarks, there will be a question-and-answer session. Instructions will be given at that time. If anyone should require assistance during the conference call, please press Star then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I will now turn the conference call over to General Manager of Investor Relations of Chevron Corporation, Mr. Jake Spiering. Please go ahead.

Jake Spiering (General Manager of Investor Relations)

Thank you, Katie. Welcome to Chevron's Second Quarter 2023 Earnings Conference Call and Webcast. I'm Jake Spiering, General Manager of Investor Relations. Our Chairman and CEO, Mike Wirth, and CFO, Pierre Breber, are on the call with me today. We will refer to 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 2. Now, I will turn it over to Mike.

Mike Wirth (Chairman and CEO)

Thanks, Jake. Thank you everyone for joining us today. Earlier this week, we announced several senior leadership changes, including Pierre's plans to retire next year, along with second quarter performance highlights. In a few minutes, Pierre will share more details on our financials, which included return on capital employed greater than 12% for the eighth consecutive quarter and another quarterly record in shareholder distributions, more than $7 billion. At TCO, we're making good progress with commissioning and pre-startup activities, including introducing fuel gas to new facilities. In the third quarter, we expect mechanical completion for the Future Growth Project and to complete a major turnaround. Cost and schedule guidance is unchanged. Conversion of the field from high pressure to low pressure is expected to begin late this year. FGP is on track to start up by mid-next year.

We have unused contingency, which gives us confidence that we'll complete the project within the total budget. After completion of these projects, TCO is expected to deliver production greater than 1 million barrels of oil equivalent per day and generate about $5 billion of free cash flow, Chevron share at $60 Brent in 2025. Chevron's Permian production set another record in the second quarter, about 5% above the previous quarterly high. We expect next quarter's production to be roughly flat before growing again in the fourth quarter, on track with our full-year guidance. Early 2023 well performance in our company-operated assets in all three areas is consistent with our plans. In New Mexico, we've put on production 10 wells. Before year-end, we expect to POP an additional 30 wells with higher expected production rates.

As a reminder, about half of Chevron's production is company-operated, with the balance non-operated and royalty production. While short-term well performance is one measure, we're focused on maximizing value from our unique large resource base, expected to deliver decades of high-return production. Over the next five years, we expect to develop over 2,200 net new wells, growing production while delivering return on capital employed near 30% and free cash flow greater than $5 billion in 2027 at $60 Brent. Longer term, we've identified well over 6,000 economic net well locations that support a plateau greater than 1 million barrels per day through the end of next decade.

Our deep resource inventory and advantaged royalty position allow us to optimize our development plans for high returns, incorporating learnings and technology improvements as we expect to deliver strong free cash flow for years to come. In the deepwater Gulf of Mexico, the floating production unit Anchor is on location, and the project remains on track for first oil next year. We continue to build on our exploration success and were awarded the highest number of blocks in the most recent lease round. In the Eastern Med, our Aphrodite appraisal well in Cyprus met our expectations, and we've submitted a development concept to the government. At Leviathan, we're expanding pipeline capacity to nearly 1.4 BCF per day. We expect to close our PDC Energy, our acquisition of PDC Energy in August, after their shareholder vote next week.

Our teams are working on integration plans. We look forward to welcoming PDC's talented employees to Chevron. Now over to Pierre.

Pierre Breber (CFO)

As Mike said, strong, consistent financial performance enabled Chevron to return record cash to shareholders this quarter, while also investing within our CapEx budget and paying down debt. Working capital lowered cash flow primarily due to true-up tax payments outside the US. Excluding tax payments, working capital movements are variable. Our typical pattern in the second half of the year is to draw down working capital. Chevron's net debt ratio ended the quarter at 7%, significantly below the low end of our guidance range. Surplus cash on the balance sheet was reduced during the quarter, with cash balances ending at $9.6 billion, well above the cash required to run the company. Adjusted second quarter earnings were down $5.6 billion versus the same quarter last year. Adjusted Upstream earnings were lower, mainly due to realizations, partly offset by higher liftings.

Other includes primarily favorable tax items and income from Venezuela non-equity investments. Adjusted Downstream earnings decreased primarily due to lower refining margins. Opex was up mainly due to higher transportation costs and the inclusion of REG. Compared with last quarter, adjusted earnings were down $900 million. Adjusted Upstream earnings decreased primarily due to lower realizations. This was partially offset by higher production in the U.S. and non-recurring tax benefits. Adjusted Downstream earnings were down modestly. Lower margins were partially offset with higher volumes. Second quarter oil equivalent production was down about 20,000 barrels per day from last quarter, primarily due to planned turnarounds at Gorgon and in the Gulf of Mexico, and downtime associated with the Canadian wildfires. This was mostly offset by growth in the Permian. Looking ahead.

In the 3rd quarter, we have a planned turnaround at TCO and a planned pit stop at Gorgon, completed earlier this week. Our full-year production outlook is trending near the low end of the annual guidance range. Since PDC's proxy solicitation on July 7th, we've not been permitted to buy back our shares. After we close the acquisition in August, we plan to resume buybacks at the $17.5 billion annual rate, which we expect to continue through the 4th quarter. We do not expect a dividend from TCO until the 4th quarter. Full-year affiliate dividends are expected to be near the low end of our guidance. Putting it all together, we delivered another quarter with solid financial results, strong project execution, and continued return of cash to shareholders. Our approach is consistent, and you can see that in our actions and results. Back to you, Jake.

Jake Spiering (General Manager of Investor Relations)

That concludes our prepared remarks. We are now ready to take your questions. Please limit yourself to one question and one follow up. We will do our best to get all of your questions answered. Katie, please open the lines.

Operator (participant)

Thank you. If you have a question at this time, please press star 1 on your touchtone telephone. You may ask one question and a follow up question. If your question has been answered or you wish to remove yourself from the queue, please press star 2. If you are listening on a speakerphone, we ask you lift your handset before asking your question to provide optimum sound quality. Again, if you have a question, please press star 1 on your touchtone telephone. Our first question comes from John Royall with JPMorgan.

John Royall (Executive Director)

Hi, good morning, and glad to be the first on this call to congratulate Pierre on his retirement. My first question is on Upstream production. Can you bridge us maybe from the midpoint of your production guidance to the low end that you mentioned in the opening? Sounds like the Permian is on plan. What pieces have come in below the midpoint of plan to move you to that low end?

Mike Wirth (Chairman and CEO)

Yeah, John, guidance remains unchanged. We expect to be at the lower end of that. As we said, Permian production has been strong. The things that Pierre mentioned, I think, are the key things that we've seen. There's been some impact of fires in Canada that have impacted our ability of not really our operations per se. We did some evacuations on a precautionary basis, but it was midstream and processing downtime that we weren't able to move our production to market. The rest of it is, you know. Oh, and Permian, too, I guess, is the other one.

You know, we have a, an FPSO in Thailand that had an incident, and early in the year, was taken off station, and so that's another 10,000 or 11,000 barrels a day net, which is off for, you know, the foreseeable future. It's really those, those two things are the ones that are pushing us down, that were both unexpected.

John Royall (Executive Director)

Great. Thanks, Mike. My next question is just sticking to production, but just drilling in a bit on the, the Permian. The well results, generally look very strong in the first half, but, still a bit below 2022 in New Mexico. Maybe you can just update us on what inning you think you're in, just in terms of optimizing the, the single bench developments in New Mexico.

Mike Wirth (Chairman and CEO)

Yeah. you know, the thing that I think is important to bear in mind is, you know, that New Mexico type curve we showed there, there are only 10 pops represented or 10 pops that we achieved, all in the second quarter there, so there's no first quarter pops. there's only seven that actually had enough data to make it into the curve you see on the chart. it's a very thin set of data. we expect, you know, 30 more pops in the second half of this year. the bulk of the program is not represented in those curves. and there's a couple of other things.

One, the wells we did POP have had some facility constraints that have limited full productivity, so we actually haven't been able to move all the production due to some third-party facility constraints that we faced. The rest of the program is actually in a different part of the New Mexico portion of the Delaware, where we expect higher productivity. You know, it's a combination of things, but I'd caution you not to over index on a very thin data set with a lot more data to come in the second half of the year.

Jake Spiering (General Manager of Investor Relations)

Thank you. We'll go next to Devin McDermott with Morgan Stanley.

Devin McDermott (Analyst)

Hey, good morning. Thanks for taking my question. Pierre, congrats on the retirement. I wanted to just stick with the Permian since, since we're on that topic. I was wondering if you could talk a little bit just around the mix trend you're seeing there, and if we disaggregate the productivity a little bit further. You talk about how much of the uplift is coming from gas and NGLs versus oil. Then similarly, as you progress towards some of your longer-term production goals, how you expect the mix in the basin for you to trend oil, gas, NGLs over time?

Mike Wirth (Chairman and CEO)

Yeah, Devin, we're, you know, we're still drilling primary benches, so we can optimize the oil cut. Across the basin, our production remains roughly 50% oil, 25% NGLs, 25% gas. You know, we look at all the commodities, you know, oil, NGLs, and gas, and have our own long-term views on prices and markets to run the economics, to optimize to returns. You know, the gas oil ratio in aggregate has been relatively flat for a number of years, and we don't see it changing a lot. It can vary a little bit, you know, in different, different parts of the basin, but if you take it for our whole portfolio, that 50, 25, 25 remains a pretty good way for you to think about it.

Devin McDermott (Analyst)

Okay, great. I wanted to shift over to TCO. Good to hear the continued positive progress there as we get closer to the finish line. There's a lot of moving pieces, over the next year, year and a half, as we get the two phases of development online. You give the guidance for the turnaround impact in three Q. I was wondering if you'd talk a little bit more about how you see the evolution of production into the fourth quarter of this year, and then through 2024, as we get to that, you know, 2025 run rate. Shape it a bit for us as we look out over the next few quarters.

Mike Wirth (Chairman and CEO)

Yeah. You know, the headline here is no change to cost and schedule. I think that's really important. As we said, 98% project completion, and commissioning is essentially two-thirds complete. In the second quarter, we made really good progress. In the second quarter, we achieved mechanical completion of the three GI gas injection facilities and got fuel gas into the flare system, which is very important to enable an on-time startup of FGP. In the quarter that we're in now, the third quarter, we expect full mechanical completion of the Future Growth Project and also, you know, a turnaround at one of the Complex Technology Lines or KTLs.

We'll begin a lot of work and start up on utility systems, boilers, steam system, other utilities that are required for startup of the pressure boost facility, which is the key driver of WPMP, which enables us to convert from high pressure to low pressure across the field. Once that, that turnaround is done in the third quarter, and you will see some production impact, I think you're guided to that. You know, we expect to have two of the four big pressure boost compressors online, which allows us to begin the conversion of metering stations from high pressure to low pressure, and that will you know, initiate... We'll, we'll get that started at the end of this year. It'll take 10-12 months for all of those conversions to occur.

Next year, there will be turnarounds next year as well. Two more turnarounds, one at SGI and another one in one of the KTLs. All of that is part of a very carefully choreographed sequencing of turnarounds and startup activity that will bring the full fields to the 1 million barrels a day for 2025. As, as we indicated at our Investor Day, what you're gonna see in 2023 and 2024 is the normal turnaround activity interlaced with all of this project startup activity. This is not as simple as bringing on a new portion of the field. We're really reworking the entire gathering and producing capacity of the field. It's quite a complex series of activities to execute all of that.

The production reflects that. We put, I think, in Sid, in our-

Pierre Breber (CFO)

We did.

Mike Wirth (Chairman and CEO)

A chart to kind of give you some guidance for both this year and next year.

Pierre Breber (CFO)

Yeah, slide 10 from our Sid has annual production, 2023, 2024, 2025.

Mike Wirth (Chairman and CEO)

Yeah.

Pierre Breber (CFO)

No change in that guidance.

Operator (participant)

Thank you. We'll go next to Neil Mehta with Goldman Sachs.

Neel Mehta (VP and Liquidity Risk Analyst)

Yeah, good morning, team. I want to stay on TCO, and, while there will be a volume inflection in 25, there's probably gonna be a pre- free cash flow inflection in 2024, just as affiliate CapEx rolls off first. Just can you talk about the cadence of, of that and how it manifests itself in, in terms of dividends?

Pierre Breber (CFO)

Yeah. We've been guiding, Neil, this is Pierre, to the clean year, 'cause that's the $5 billion of free cash flow, $60 Brent in 2025. Of course, we're guiding to free cash flow, because as you recall, it's not just dividends, it's also repayment of the loans and the co-lending that we have done along the way, and the profile of those loans are disclosed in our SEC filings. I mean, you'll see exactly to your point, you'll see a build towards that just as the CapEx is rolled off. It was not, you know, not that long ago, we were investing $3 billion-$4 billion a year, our share into the project, and that's down to $1.5 billion or so this year, and will continue to trend down.

There's that inflection point. What's also being managed, of course, are commodity prices and those vary. As we've said, you know, TCO continues to be conservative in managing its balance sheet. It's been holding more cash on the balance sheet. As the project gets closer to the end, as we've demonstrated, TPC is running, you know, very reliably now for almost a year and a half, we expect some of that cash to come on. I can't get in front of the board of directors of TCO. It's a separate company that we are a shareholder in, but we expect, as we said, a much bigger dividend in the fourth quarter than we saw in 2Q.

We expect to see a release of some of that ex- surplus cash that's been held on the balance sheet, and that'll continue over the next couple of years as we head into that $5 billion of free cash flow in 2025. Maybe the last thing, Neil, I know you know this, you know, TCO has, has really good price sensitivity. I, I've seen that's your- yours and other estimates, that $70 or $80, you know, the cash flow is even stronger.

Neel Mehta (VP and Liquidity Risk Analyst)

Yeah. Thanks. Thanks, Pierre, that was great. The follow up is just on the return of capital. I, I think, this, while you have a big buyback range, it, it-- a lot of market participants have kind of viewed your $17.5 billion as the P50 outcome in any reasonable commodity price environment. So thinking less of it like a flywheel and more as sort of a relatively fixed number, unless commodity prices go wacky. Just, just any, any thoughts on that statement and whether you, you're trying to give us a little bit more surety around that number as opposed to a more volatile number?

Pierre Breber (CFO)

Yeah. The range, Neil, is tied to the upside downside cases that we showed at our Investor Day, roughly, right? There's $10 billion-$20 billion. You're right, it's a wide range because it reflects a wide range of prices between that upside case and the downside case. Of course, in between, there's a sort of a mid-cycle case. As a reminder, that downside case gets to $50 in a couple years and stays there for 3 years. That is a real downside case, and that's what the low end of the buyback range is, you know, notionally tied to. The upside case is a case that's not too different from what we're seeing now. It averages about $85 over the 5-year period.

It trends down to 70 towards the end of that period. That's why you're seeing a buyback, very close to the top end of the range, at the $17.5 billion. It's certainly a signal that as we look out, over this commodity cycle, and again, we think of the buybacks as being steady across a cycle, that we feel good about it. We've said we could do a much larger buyback. That would be, you know, not steady, and we don't wanna be procyclical. We're trying to be across the cycle. Yes, when we guide on buybacks, we're guiding with the intent of maintaining it for a number of years across the cycle.

Mike Wirth (Chairman and CEO)

Neil, I would just add, you know, you see in our second quarter results here, our net debt remains very, very low, and we've indicated multiple times that we don't have a problem gearing back up and putting more debt on the balance sheet to get back towards the, the range that we've guided to through the cycle, in order to sustain a very steady, share repurchase program.

Operator (participant)

Thank you. We'll go next to Stephen Richardson with Evercore ISI.

Stephen Richardson (Senior Managing Director)

Thanks. Good morning. Mike, I was wondering if you could talk a little bit about new energies. I think you've been clear from the beginning that, you know, build versus buy was, you know, part of the consideration in a lot of these businesses. We saw a big CO2 pipeline and EOR company transact recently. Maybe you can talk a little bit about the CCUS business as, as you view it, and you know, why build versus buy is, is maybe the better choice for, for Chevron. Maybe I just get ahead of it with a follow up, is maybe you could give us a little bit of an update on, on Bayou Bend, please.

Mike Wirth (Chairman and CEO)

Sure. Why don't I- I'll put those two together, actually. look, we'll do both build and buy, I think, in new energies. I would fully expect us to do that. In, in renewable fuels, we have built up the business, but then we also went out and acquired a Renewable Energy Group. I think you'll see both. certainly, you know, the, the, the Denbury transaction is one that the market somewhat anticipated, and you can presume that multiple market players probably took a look at or had conversations with Denbury. For us, in CCUS, we look for areas that have good geology or pore space. They're near concentrated emissions and have the right policy support to enable a, a business.

The Gulf Coast has all of these things, and at Bayou Bend, we've got about 140,000 acres of permanent CO2 pore space, both onshore and offshore. We've got storage potential there of greater than 1 billion metric tons. In the second half of this year, we're going to drill a strat well in the offshore acreage to further delineate and characterize the subsurface. In the first part of next year, we expect to drill a strat well in the onshore acreage and do the same. Of course, we're in conversations with a number of customers in that region, in the Golden Triangle, up at Mont Belvieu, all the way across the Houston Ship Channel, and we've got term sheets going back and forth.

We're in negotiations with a number of different potential customers. You know, the commercial framework for this is still evolving. And we're working on the other pieces you need. So well, injection permits and midstream assets. We've got an RFP out right now, with a number of midstream providers, consistent with the way we have generally approached the midstream. We own assets if they're strategic, if there's a way for us to go to somebody who's in the business of operating-- building and operating midstream infrastructure, we certainly look at that as well. So we're putting all the pieces together there for a phased development. We like the Bayou Bend project, and, you know, we'll, we'll report more.

To your kind of underlying question, you know, we'll, we'll, we'll build organically, and, we'll, we'll do inorganic where it makes sense.

Stephen Richardson (Senior Managing Director)

Great. Thanks very much.

Operator (participant)

Thank you. We'll take our next question from Biraj Borkhataria with RBC.

Biraj Borkhataria (Global Head of Energy Transition Research)

Hi, thanks for taking my questions, and Pierre, best of luck with retirement. My first one is on portfolio concentration. At your Investor Day, you talked about just over $20 billion of free cash flow at $60 a barrel. Looking through today's slides, you know, roughly half of that in the medium term will come from the Permian plus TCO. I understand that you want, you know, every dollar to go to the highest level of return, which is completely sensible. I was wondering if you can talk about portfolio concentration, 'cause it is quite unusual for a super major to have that level of concentration in terms of free cash flow.

How do you think about, you know, portfolio diversity, and is this, is this something you're actively trying to address going forward? I've got a follow up on a different topic. Thank you.

Mike Wirth (Chairman and CEO)

Yeah, Biraj, you know, if you look back over the last decade, we've cleaned up our portfolio. We had a lot of assets that were, you know, kind of at the smaller end of the tail, that, you know, pulled capital and management time and resources. We wanna be, we wanna be diversified. We've got a diverse portfolio, but we don't need to be diversified just for the sake of it. We wanna have assets that have scale and are material and long-lived. You know, you can start in the Far East and look at our LNG positions in Australia, which aren't drawing a lot of capital right now, but are throwing off a lot of cash.

We've got a strong position in West Africa that we strengthened with the Noble acquisition and the EG assets that can feed LNG into, into Europe. You, you mentioned TCO. The Eastern Med is a very strong position. We've recently taken FID and are working on expansion projects for Tamar, Leviathan, and have submitted a concept on Aphrodite. There's a lot of opportunity in that asset. When we close PDC, we're gonna be producing 400,000 barrels a day in the DJ Basin. We've talked about some of our other shale and tight assets in Argentina, in Canada. We've got two crackers underway in CP Chem, that'll come online middle of this decade, one in the U.S., one in the Middle East. We've acquired REG and are growing our renewable fuels business.

We have exposure across a large portfolio, and then, of course, we also have projects coming online in the Gulf of Mexico. I mentioned Anchor earlier, Whale, Ballymore, and we recently acquired more leases in this recent lease sale than twice as many leases as in the biggest lease sale over the last 8 years. We're adding to our position in the Gulf of Mexico. This idea that we're a 2-asset company, the Permian and TCO, I don't think really stands up to careful inspection. They're 2 great assets, and so they get a lot of attention, but we've got a lot of other strong assets in our portfolio.

Pierre Breber (CFO)

Hey, if I can just build off that and, and go to the return of capital question that Neil asked, and that's what gives us confidence, not only on the buyback, but on the track record of dividend growth. We got it to 10% annual free cash flow coming from all those businesses. Some are holding cash constant, some are growing cash flow, that, that Mike covered, and that goes to leading dividend growth, where we've grown the dividend over the last five years at rates, double our closest peer and much higher than others, and where we have a buyback, that is, nearly 6% of our shares outstanding annually.

You know, our business is built for $50, part of the confidence in our ability currently, if you look at our break-even and adjust for working capital this quarter, if you look at the last 4 quarters, it's actually probably a little bit lower than that with the strong refining margins that we've been seeing. We're built for lower prices. Free cash flow is gonna grow from this base. That should give investors confidence in our ability to continue to grow the dividend at leading rates and to maintain buybacks at, at also very high rates.

Biraj Borkhataria (Global Head of Energy Transition Research)

I've got just follow up on a different question. Through the Permian, you'll be producing a lot more gas over time, and you have expressed a desire to grow in LNG, so you've signed a couple of deals as an offtaker to synthetically integrate your U.S. gas position to global markets. I wanted to ask about the sort of whether you'd be interested in owning liquefaction or whether you feel, being an offtaker is enough, 'cause some of your peers have argued, the benefits of integration and owning through the value chain. I think in the past, you've noticed the returns are typically lower.

I'm particularly interested in asking that question now because a number of players have signed offtake agreements with companies such as Venture Global, and then actually they're not receiving the gas as agreed. Just interesting how you're, how you're thinking about that sort of value chain in LNG. Thanks.

Mike Wirth (Chairman and CEO)

Yeah, I mean, it's consistent with what we've described earlier, and I think you've, you've captured it. You know, it, it depends on the circumstance. In places where we've got remote, where you need to be in the entire value chain, and you can, you can create an economic model that supports the investments, you know, we, we've done that. In other locations where you've got other people that will put capital into the midstream assets, and we can, we can sell gas into that, we can offtake gas off of it, but not participate in some of the very capital-intensive and lower return portions of the value chain, you know, that's certainly a model that, that helps us support our aspiration to drive higher returns.

You have to have good partners, you have to have reliable operations, and we'll work closely with the companies that we have offtake with. We vet them carefully, and we have confidence in the people that we are working with, to, you know, to provide those reliable operations. You know, we're really looking to drive high returns, not necessarily to own assets for, for the sake of control, unless it creates a differentiated value proposition.

Operator (participant)

Thank you. We'll take our next question from Sam Margolin with Wolfe Research.

Mike Wirth (Chairman and CEO)

Morning, Sam.

Sam Margolin (Managing Director)

Hello.

Mike Wirth (Chairman and CEO)

Hey, Sam, you're breaking up.

Sam Margolin (Managing Director)

The question's on the cash balance. It looks like nominally it's, you know, drawn down, but there's some inputs that would theoretically help it rebuild in the second half. You've got working capital, I think TCO is gonna pay a dividend in third quarter. PDC had a very front-loaded capital program, too, so that's coming on with free cash. Just wondering about the cash balance and how you think about the level or if we're gonna be in a rebuild phase for 2H.

Pierre Breber (CFO)

The, the direction that it goes depends, of course, on commodity prices and margins and a number of other factors. You're right, our cash levels have come down, in part due to working capital outflows, timing with affiliate dividends, and we've also paid down some debt. We've been, I think, very clear that we don't want to hold surplus cash, certainly not permanently, that it's, it's where the cash goes in the short term. But over time, that cash is gonna be returned to our shareholders in the form of this growing dividend, and, and, ratable buyback program. So we need only about $5 billion to support our operations. We're nearly $10 billion at the end of the second quarter, so that's more than sufficient. We have access to lots of liquidity.

We don't have any commercial paper now. We've been paying down debt, so that's the more economically efficient way to manage the balance sheet if we get there. Whether the cash balance goes up or down, again, depends on all the inputs and outputs that we've been showing. You know, we're guiding towards the net debt, as Mike said, the net debt is well below the low end of our guidance range. We look at all those factors, and again, if cash balances head down to $5 billion, that'll be adequate to cover the operations.

On working capital, you know, our pattern in the second half of the year is that we tend to see some draws on it, but we're certainly not gonna recover from what we've seen in this first half of the year. A big portion of what we saw in the first half of this year on working capital are really tax payments tied to earnings last year. You can kind of think of those as being offset from last year, where we had where we had that, you know, a favorable working capital environment. There'll be ups and downs along the way. Over time, working capital tends to average out over zero, but these are just timing effects. We look through them.

We knew we had taxes due, so that's all part of the planning as we look at the balance sheet. Sam, I guess that we've guided to a TCO dividend in the fourth quarter. We do not expect a dividend in the third quarter.

Sam Margolin (Managing Director)

Got it. Okay, sorry. I must have misread that remark. The, the follow up is, actually sort of on the organization. It's a follow up to Steve's question earlier. You know, Pierre had spent some time in an ESG role and a low-carbon role, and the incoming CFO is coming from a role where there was a lot of, you know, work on the ground on the, on the low-carbon front, on the technology side. So Chevron has this really interesting sort of marriage between finance and, and low carbon that I think is differentiated when you look at some of the peers. So the question is, you know, as we make progress through the low-carbon development, do you feel like you're embedded in the highest return areas, or are there other ones, where capital is gonna maybe pivot?

I think that ties into carbon capture, too, because that seems like a place where the incentives are pretty transparent.

Mike Wirth (Chairman and CEO)

Yeah, Sam, I, I think your question started with people and ended up kind of at, at, at our kind of investment priorities in new energies. Look, across the entire leadership team, we've got a commitment to driving higher returns and lower carbon, and people move through different kinds of roles, but this is part of every role in the company today. It's a, it's a, it's a part of the business. It's something we're committed to. You know, our, our focus is, as, as we've said before, it's on things where we can leverage our unique capabilities, assets, value chains, customers to create a sustainable competitive advantage in these new energy businesses.

It's why we've not gone into wind and solar on a merchant basis because there's others that, that can do that, and we don't, we don't really bring anything unique there. Our renewable fuels business today is, is profitable and generating cash. We expect to start up the Geismar expansion of be producing more renewable diesel next year. That's a business today that is economic and attractive, and we continue to grow, particularly back into the feedstock side. We announced an acquisition this last quarter of a small company that's got some interesting feedstock technology. Carbon capture and storage, obviously, is being built. You know, we, we've do it today in, in some assets, but as a business, we're, we're building out Bayou Bend, I talked about.

We're working on projects in other parts of the world as well. We do believe that with the right technology, the right business model and policy environment, that there is a there's an opportunity there. Other things that we're working on, hydrogen is one that both, you know, electrolytic hydrogen and then traditional hydrogen paired with carbon capture and storage. In the U.S., the IRA incentives can, you know, certainly, you know, support the development of business models there. You know, I think we'll stay consistent with this. We're looking at it, you know, always looking at new technologies, but the area we've focused on is the primary, you know, primary area you should expect to see us investing.

Operator (participant)

Thank you. We'll go next to Jason Gabelman with TD Cowen.

Jason Gabelman (Director of Energy Equity Research)

Hey, morning. Pierre, congrats on your retirement. I'd like to go back to the Permian detail for a minute, if I could, and kind of two questions on this. First, has CapEx in the Permian deviated at all from that $4 billion budget that you highlighted at the Analyst Day? The second part, on the Permian inventory over the five-year plan and long term, what percentage of those locations would you categorize as Tier 1? Thanks.

Mike Wirth (Chairman and CEO)

Yeah, Jason, Permian CapEx is up a little bit this year, primarily, you know, three things. Number one, we've actually seen drilling performance continue to improve and completions performance continue to improve. Out of the same fleet of rigs and completion spreads, we're getting more work done, which means you consume more tubulars, more sands, more water, et cetera. That's, that's kind of a good thing. We're seeing some longer lead times on some of the critical elements in facilities. We've actually had to make some long lead purchases for next year's program that we didn't anticipate as we were lining out this year's program.

Then we've increased facility scope for water handling in some areas of the Permian, particularly as, you know, we're trying to manage some of these induced seismicity issues. We're being more, more careful. We're moving more water, and so that has all led to some, some increase in CapEx. Not a lot of inflation there. The inflation's been largely in line with what we had expected, and the rig fleet is being activated in line with what we expected. Your second question on inventory, you know, we don't really, we haven't broken our portfolio into tiers. There's not a very clear definition of that and a way to kind of do that on a standard basis.

When we've outlined the drilling locations and the long-term guidance there, it's really based on economics. You know, we've got locations that are economic at our price view for the future, which has historically not been, you know, a super aggressive price view. It's based on today's technology, and as indicated, we've got, you know, more than 6,000 locations in that outer time window that are economic based on those assumptions. By the time we get to that window, we may or may not see a different price environment. I fully expect we'll see a different technology environment, which can allow that number to grow even further. We look at it more in terms of the economics of the development than tiers.

Jason Gabelman (Director of Energy Equity Research)

Great, thanks. My follow up, just going back to TCO. You made some comments on kind of maintenance effects over the next 4 quarters, and I know you showed it graphically, but are you able to quantify the actual impact to production over the next 4 quarters from all these turnarounds and startup activities?

Pierre Breber (CFO)

Well, Jason, we, we do it quarterly, like it's it, it's included in the third quarter guidance that we provided, and we'll continue to do that quarterly. You're seeing it sort of annually. We're giving annual guidance on TCO, so it's all embedded in there. I think we showed it relative to 2022, but there's just a lot of moving parts. We'll continue to give that guidance each quarter, and you have annual guidance that incorporates all of that.

Operator (participant)

Thank you. We'll take our next question from Irene Himona with Société Générale.

Irene Himona (Managing Director and Head of Oil & Gas Sector)

Thank you very much. My first question is on the Downstream, please. If you can talk around the, the performance of your chemicals, affiliates, in particular in Q2, and, and then what you're seeing so far in the third quarter. Then, also what you would expect in terms of refining margin evolution in the second half of the year, given the, the, the weakness in Q2. Thank you.

Mike Wirth (Chairman and CEO)

Yeah. You know, the chemicals business is cyclical, as, as everybody knows. We're certainly in a period now where we're seeing some, you know, length in supply due to new build facilities, some, you know, there, there's some length there. It's weighed on margins in the olefins chain. In the short term, you know, we think we're, we're gonna continue to see, you know, that'd be a pretty tough sector. As you get out to, to mid-decade and beyond, you know, demand will continue to grow, and we expect demand and supply will come into better balance, and we'll, we'll see those margins, you know, recover, you know, out towards the, the middle and second part of this decade.

Your second question, I'm sorry, I was thinking about chemicals there and-

Irene Himona (Managing Director and Head of Oil & Gas Sector)

Oh, refining, the refining output.

Mike Wirth (Chairman and CEO)

Margin, refining, refining margins. Yeah. Certainly we've seen refining margins come off the very strong levels that they were at last year. There's been some new capacity come into the system around the world, some big new refineries that have begun to start up, or major projects that have come online. Margins have softened year-on-year. Certainly the West Coast in our portfolio is important. West Coast margins, both in the refining and the marketing part of the value chain, have held up a little bit better because it's a market that is a little bit more cut off from the rest of the world than the Gulf Coast or Asia. You know, demand continues to be pretty strong out there. Gasoline demand is strong.

Jet demand continues to come back. Diesel demand has maybe flattened out a little bit, but certainly holding. You know, we're in an environment where I would expect, you know, inventories are, are towards the lower end on the products in a number of parts of the world. I think refining margins, you know, for the second half of this year, you know, are likely to be as good as they were in the first half of the year, at least.

Irene Himona (Managing Director and Head of Oil & Gas Sector)

Thank you. My, my follow up is... Sorry.

Operator (participant)

Please continue. Please continue.

Irene Himona (Managing Director and Head of Oil & Gas Sector)

Am I allowed-

Operator (participant)

a follow up? Sorry.

Mike Wirth (Chairman and CEO)

Yes.

Irene Himona (Managing Director and Head of Oil & Gas Sector)

Thank you.

Mike Wirth (Chairman and CEO)

Yes, please go ahead.

Irene Himona (Managing Director and Head of Oil & Gas Sector)

Just on the Eastern Med. Thank you. On the Eastern Med, following your FID for the, the pipeline in Israel, I was wondering, is that it for the time being for Leviathan, or do the partners continue to, to examine other options like FLNG, for example? Thank you.

Mike Wirth (Chairman and CEO)

Yes. No, we continue to evaluate other options. In fact, we're, we're working towards a concept select for the next expansion of Leviathan, ideally, at the end of this year. Floating LNG is one of the concepts that, that we continue to look at.

Operator (participant)

Thank you. We'll go next to Ryan Todd with Piper Sandler.

Ryan Todd (Managing Director and Senior Research Analyst)

Great, thank you. Maybe, if I could follow up on some earlier Permian conversations. You talked a little bit about some of the New Mexico well performance, but on well performance overall, that you disclosed, you know, it appears that first half results are showing improved performance across, across much of the basin, as you expected. You know, what have you seen to date in terms of addressing some-- I know you don't have a lot of data, but in terms of addressing some of the concerns from last year, you know, particularly, what have you learned regarding spacing, single versus multi-bench approach, et cetera, on the wells that you've, that you've done so far this year?

Mike Wirth (Chairman and CEO)

Yeah, I mean, the, the performance is really consistent with our expectations and what we outlined at our Investor Day earlier this year, Ryan. You know, there, there are a couple things just to remember. I mentioned earlier that in New Mexico, we saw some infrastructure and third-party constraints. You can have that in-- We've got that in some other parts of our portfolio as well. So there are things that will show up on these curves that are not necessarily just a reflection of the geology and the well performance. As we, as we continue to change our development strategy on well spacing, proppant loading, well length, et cetera, you know, those will continue to be reflected in these curves. The, the thing that is really important is production.

We put production out there because everybody likes to see it. We're not optimizing the production, we're optimizing the returns. Fluid mix, EUR, capital investments, you know, are all important parts of, you know, of what we're optimizing to. It's harder for you to see all the things that we're looking to optimize to drive returns when you're just looking at production. You know, the high-level answer is performance in line with the expectations as we've, you know, we've continued to evolve our program.

Ryan Todd (Managing Director and Senior Research Analyst)

Okay, thanks. Maybe if we turn to the Gulf of Mexico, as we think about your, your Gulf of Mexico deepwater portfolio, you've got an impressive string of project startups coming over the next few years. How exposed are you to escalating trends in, in deepwater drilling and development costs? As you look across those projects, do you have costs locked in across, you know, some of those projects, rigs under multiyear contracts, et cetera, or is this a... you know, I guess, how much are you able to mitigate, you know, cost escalation as we think over, you know, kind of CapEx requirements over the next few years?

Pierre Breber (CFO)

Yeah, those projects were contracted at a different time, so they, they reflect mostly locked-in rates, as you'd expect. Procurements, you know, well behind us as those projects are pretty far along. You know, new exploration activity, we'll, we'll get exposed to some of the higher rig rates on that, but for the existing major capital projects, that's largely locked in.

Mike Wirth (Chairman and CEO)

We came into the year with 3 rigs under contract that were contracted back in a different environment.

Jake Spiering (General Manager of Investor Relations)

Thanks, Ryan.

Operator (participant)

Thank you.

Mike Wirth (Chairman and CEO)

Okay, we got a handful of people still in the queue. Yep.

Operator (participant)

We'll go next to Paul Cheng with Scotiabank.

Paul Cheng (Managing Director)

Hey, guys. Good morning. First, I want to wish Pierre a exciting and very happy post-retirement. Thank you for the help over the past 20-plus years. Maybe there are two questions, if I could. One, you're talking about you submit a development plan in Cyprus discovery. Can you give us a little bit in terms of the timeline, what should we expect? Also that, what is the preliminary design of the development is going to look like in this scale?

Roger Read (Senior Energy Analyst)

... what kind of time that it's going to see the first oil? The second question that you haven't talked much about Argentina, and over there, that the government seems to be pretty excited with the shale oil development, and you have a position there. Can you give us an update? What is your thinking over there? Thank you.

Mike Wirth (Chairman and CEO)

Yeah, Paul, in Cyprus, we've, you know, we're pleased with the outcome of the recent appraisal well. We've submitted our development plan to the government for their approval. It involves a capital-efficient way to take the gas to market via subsea tiebacks to existing infrastructure. This is all pending government approval. If we get that, we could be into FEED later this year, but it's a little early for us to really lay anything out on first gas. As, as we get, we get through the government approval process, we'll be back to talk to you about the timeline on that one. On Argentina, you know, we, we remain very positive on the resource there. There's an election coming up.

The country's got its, you know, some, some kind of macroeconomic challenges that it's facing right now. We like the, we like the Vaca Muerta, particularly Trapial area, where we're doing some more development work now, with, you know, some increased capital that flows with that. We'll talk to you about that at Investor Day and beyond. You know, no real changes there. It's gonna be part of the growth story.

Roger Read (Senior Energy Analyst)

Thanks, Pierre. Thank you.

Operator (participant)

We'll go next to Doug Leggate with Bank of America.

Doug Leggate (Managing Director and Head of US Oil and Gas Equity Research)

Thanks, so for getting me on, guys. Pierre, it's been a pleasure. Congratulations, and good luck to everybody. Mike, to you as well on your extended tenure. Guys, my, my, my first question is on the, the Permian ratability. It looks like you've got about a couple of hundred POPs this year, you know, wells to sales, 2,000 over the next 5 years. Is that ratable? How, how should we think about the step up in activity?

Pierre Breber (CFO)

Hey, just one thing, it's the co-op POPs is 200, if you were to include net POPs, again, half of our portfolio is non-op and royalty, it'd be more like 300. It looks more consistent, right? The long-term plateau and the, the well inventory, the 2,200 over the next five years, incorporates all of the activity, The POP data was just on company operates. There is, there is some increase, but not as, not as large as it, as it looks. You just gotta get apples to apples.

Doug Leggate (Managing Director and Head of US Oil and Gas Equity Research)

fairly ratable, Pierre? I mean, like 500 a year type deal or 400 a year type of deal?

Pierre Breber (CFO)

Yeah, as we, as we get up to activity and as, as Mike said, we're becoming more efficient as our other operators that, that, that we work with, yeah, it's gonna be pretty ratable once we get full up to our full, you know, full rate activity.

Mike Wirth (Chairman and CEO)

Yeah, of course, Doug, you know, quarter to quarter, there's some variability as we saw first quarter to second quarter this year. Third quarter's gonna be a little... There can be some, some surges and plateaus quarter to quarter, but on an annual basis, yeah, it's gonna be pretty ratable.

Doug Leggate (Managing Director and Head of US Oil and Gas Equity Research)

That's helpful. Thank you. My, my follow up, guys, is, is on Tengiz, but it's a slightly different question. You know, I guess Pierre and I are similar vintage. We signed Tengiz in 1993. It expires 6 years after the end of your annual state trajectory through 2027, and it's a quarter of your free cash flow. My, my question is, what are your options there? Whether it be extend or replace, and perhaps maybe some color on what the production profile looks like post-2027. Would Mike have it going into fairly severe decline after 2030? Just wanna know what you're thinking about the long-term sustainability of those free cash flows.

Mike Wirth (Chairman and CEO)

Yeah. The, you know, the concession's a decade away. We're, we're focused on delivering the project right now. You know, this is a big, complex asset, a big complex project. We'll certainly be in discussions with the government over time about potential extension of this. It'll reflect what we see in terms of reservoir performance and in production opportunities out into the future. You know, these concession discussions have to create value for, for the country and for Chevron. We've gotta find something that works for, for both parties. You know, we've, we've walked away from concessions, as you've, you know, covered extensively, Doug, where it didn't work for us in places like Indonesia and Thailand. We've extended in places like Angola, where it did.

We'll be talking more about that, over time, but right now we're really focused on project execution and delivering FGP.

Jake Spiering (General Manager of Investor Relations)

Thanks, Doug.

Operator (participant)

Thank you. Our last question comes from Roger Read with Wells Fargo.

Roger Read (Senior Energy Analyst)

Yeah, thanks. Good morning, everybody.

Mike Wirth (Chairman and CEO)

Good morning, Roger.

Roger Read (Senior Energy Analyst)

I guess my first question for you, with the extension of your tenure, you willing to share with us what some of the things you're hoping to get done in the extra time will be? You know, or, or maybe what some of the, the real opportunities are here, that you'd like to shepherd through?

Mike Wirth (Chairman and CEO)

Well, Roger, you know, it's been a pretty turbulent first part of my tenure with a major restructuring, a pandemic and oil prices that collapsed, a war, and oil prices that spiked. You know, the political and geopolitical noise that comes with those things, the ongoing climate and ESG issues, three acquisitions, one of which we still haven't closed. So I'm actually looking forward to a little smoother water, I hope, one day. Look, we still got work to do to continue to drive higher returns and lower carbon. So it's to continue that continue that work. We've got good momentum in our business. We've delivered strong results....

through all of that turbulence, and, and have maintained strong shareholder distributions throughout and strategic consistency throughout, where, you know, we've seen others in the industry, you know, buffeted around a little bit by these forces. I'd like to continue that and to drive more value to our shareholders and higher returns and lower carbon.

Roger Read (Senior Energy Analyst)

All right. I commend you for not trying to duck, duck out when things finally look good for, for at least a short time. My follow up question is really much more on a modeling front. If we look at your realizations on oil, they were much stronger here in the second quarter. I think that contributed to some of the outperformance. What we really saw was a dip Q1 and improvement Q2, kind of back in line with traditional. I was just wondering, as we think about, you know, was that a timing issue, a regional issue, first quarter, and anything you should, you know, we should be thinking about as we look at your realization or capture on oil prices going forward?

Pierre Breber (CFO)

Hey, Roger Read, our view that we've not quite picked that up. Why don't you follow up with Jake after the call and make sure we understand your question, and we'll give you our best take on it. Our oil realizations have looked good, and our natural gas realizations have looked strong. We had better timing in the first quarter. If you look quarter-on-quarter in some of our international gas, it might seem a little weaker, but not sure on liquid, so please follow up with Jake.

Jake Spiering (General Manager of Investor Relations)

Thanks, Roger. I would like to thank everyone for your time today. We appreciate your interest in Chevron and your participation in today's call. Please stay safe and healthy. Katie, back to you.

Operator (participant)

Thank you. This concludes Chevron's Second Quarter 2023 Earnings Conference Call. You may now disconnect.