CVX - Chevron - Earnings Call Transcript Q3 2021

Operator: Please standby. We're about to begin. Good morning. My name is Katie and I will be your conference facilitator today. Welcome to Chevron's third quarter 2021 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. If anyone should require assistance during the conference call, . As a reminder, this conference call 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 Third Quarter Earnings conference call. I'm Roderick Green, GM of Investor Relations and on the call with me today are Mark Nelson, EVP of Downstream and Chemicals, and Pierre Breber, CFO. We will refer to the slides and prepared remarks that are available on Chevron's website. Before we get started, please be reminded that this presentation contains estimates, projections, and other forward-looking statements. Please review the cautionary statement on Slide two. Now, I will turn it over to Pierre.

Pierre Breber: Thanks, Roderick. We reported third quarter earnings of $6.1 billion or $3.19 per share, highest reported earnings in more than 8 years. Adjusted earnings were $5.7 billion or $2.96 per share. The quarter's results included 2 special items: asset sale gains of $200 million and pension settlement costs of $81 million. A reconciliation of non-GAAP measures can be found in the Appendix to this presentation. Adjusted ROTCE was greater than 13% and we lowered our net debt ratio to below 19%. Strong operating cash flow enabled us to deliver on our financial priorities, including the resumption of share repurchases. Compared to before COVID, operating costs are down, upstream production is up, and we're much more capital efficient. Cost efficiency and capital efficiency are essential to navigate commodity price cycles. Providing resilience through the low periods, and leveraging upside when markets are strong. This has been evident over the past several quarters, and especially so in the most recent one, as we generated Company record free cash flow higher than the strongest quarters in 2008 and 2011 when oil prices were well over $100 a barrel. Adjusted earnings -- adjusted third quarter earnings are up more than $5 billion versus last year; primarily on higher prices, margins, and volumes. Compared with last quarter, adjusted third quarter earnings were up almost $2.5 billion. Adjusted Upstream earnings increased on higher realizations and positive timing effects primarily related to managing LNG portfolio pricing exposure. Adjusted Downstream earnings increased primarily on higher refining and marketing margins. The all other variance was positive due to lower corporate charges and the use of deferred tax assets, which previously had evaluation allowance. Third-quarter oil equivalent production with increased 7% year-over-year due to the Noble acquisition and lower curtailments, partly offset by price-related entitlement effects and asset sales. I'll now pass it over to Mark.

Mark Nelson: Thanks, Pierre. In downstream and chemicals, we delivered our best adjusted earnings in more than 4 years. Demand for our product is strong, it with recovery of jet fuel sales expected as international travel gradually returns. And while the improving market environment helps, we're focused on what we can control. Safe and reliable operations, capital and cost efficiency and value chain optimization, to drive higher returns. Some examples of our self-help actions include; using digital tools to improve planning, scheduling, and prioritization of maintenance activity, leveraging data analytics and asset flexibility to increase margins, and adopting new technology like robotic inspection in maintenance procedures. During our Investor Day in March, I highlighted that self-help is expected to drive higher returns for Downstream and Chemicals. We're on track to meet that guidance with benefits already flowing to the bottom line. Chemicals performance is also strong, as CPChem response to current market conditions while continuing to keep a focus on longer-term unit cost reduction. GS Caltex reached 100% design capacity of its mixed feed cracker ahead of schedule, and under budget. The CP Chem U.S. Gulf Coast II Project, continues to advance towards a final investment decision, in a disciplined way that positions the project to earn attractive returns through the cycle. And Ross Lavonne (ph) Project is in and we continue to evaluate this project. We believe in the long-term fundamentals of chemicals. Our investment focus continues to be on the low end of the supply cost curve, advantage feed stock, competitive capital, and cost structure, and strong project execution. Since our energy transition spotlight, we closed the acquisition of an equity interest in American natural gas and its network of 60 CNG retail sites with our partner Rick curiae, enabling us to meet customers needs beyond California. We're also delivering first gas through our bright Mark partnership, and all Kalbe Biogas forms are now online. We sold the first sustainable aviation fuel produced from our El Segundo Refinery to Delta Airlines at LAX. And earlier this month, we announced an agreement to acquire Neste's Group 3 base oil business and its next base brand. Pending regulatory approval, we anticipate closing in the first quarter of 2022. The acquisition is expected to provide a capital efficient approach to expand our base oil offerings. And coupled with Novvi's renewable products, position Chevron to be the supplier of choice to meet customers' needs now and into the future. Back to you, Pierre.

Pierre Breber: Thanks, Mark. We recently released an updated climate change resilience report, which includes a stress tests and portfolio under IEA 's Net Zero 2050 scenario. A new target called portfolio carbon intensity, that includes scope 1 and 2 and scope 3 emissions from the use of our products. And Chevron 's Net Zero 2050 aspiration for Upstream scope 1 and 2 emissions. I encourage everyone to read our latest report available on our website. Now looking ahead, in the fourth quarter, we expect lower production due to a planned turnaround at Wheatstone, which was completed last week. And repairs at the Alba gas plant and Equatorial Guinea. In addition, our participation in Rokan PSC in Indonesia ended in August. Production from Rokan averaged 84,000 barrels of oil equivalent year-to-date. We expect earnings from JKM -related spot sales out of Australia to increase around $50 million from three quarter -- from third quarter, due to fewer spot cargoes as our long-term customers increased deliveries heading into winter. We're also expecting three discrete cash items, the return of capital from Angola LNG, TCO 's first dividend in several years, and a federal income tax cash refund. There are no P&L impacts from these items. During 4Q, we expect to buy back shares at the high end of our guidance range. Finally, we're lowering our full-year CNE guidance to $12 billion to $13 billion, primarily due to COVID -related project spend deferrals into next year, lower non-op CapEx in the Permian, and continued capital efficiencies. To wrap up the quarter, we continue to make progress towards our objective of higher return lower-carbon. We're more capital and cost efficient, generated record free cash flow, and are taking actions to lower the carbon intensity of our operations, and grow lower-carbon businesses. We're executing a straightforward strategy that's expected to deliver value now and well into the future. With that, I will turn it back over to Roderick.

Roderick Green : That concludes our prepared remarks. We are now ready to take your questions. Please try to limit yourself to 1 question and 1 follow-up. We will do our best to get to all your questions. Please open up the lines, Katie (ph).

Operator: Thank you. . Our first question comes from Devin Mcdermott with Morgan Stanley.

Devin Mcdermott: Good morning. Congrats on the great results. So my first question, Pierre, I think is for you, I just wanted to ask for a little bit more detail on the reduction in the capital spending guidance for this year. It sounds like it's a mix of different factors. Some of it's deferrals next year, some of it's a mix of non-op and efficiency gains. He's bridged the Delta, a little bit more detail for us and also talk about whether or not these deferrals or how these deferrals impact planned 2022 spend.

Pierre Breber: Thanks, Devin. We lowered our CapEx guidance to $12 billion to $13 billion. That's from our budget of $14 billion, and from our revised guidance that we had in the second quarter of $13 billion. So in the last quarter, what's changed -- while we continue to see non-op spend in the Permian below our expectations, we did have some deferred major capital project spending tied to Hurricane IDA and the Delta variant wave. And then we've seen -- continue to see -- continue capital efficiency across in the Permian and across the portfolio. It does not change our CapEx guidance -- our CapEx guidance for next year and through 2025 is $15 billion to $17 billion. We do expect higher CapEx in the fourth quarter and next year. The low end of that range is about a 20% increase from the midpoint of our revised guidance. So these deferrals are very manageable. And again, I would think from the original $14 billion budget, about half, you can think of a deferral and half I would say is capital efficiency and cost-savings what we're getting, the same results at -- for less capital.

Devin Mcdermott: Got it, makes a lot of sense. And then my follow-ups on cash returns. So very strong free cash flow in the quarter. Your debt target is now below the bottom end of your target range. It's good to see the increase in the cadence of the buyback in 4Q, I guess my question is, what are some of things you're looking for to further increase that buyback target back to something closer to the pre - COVID run rate?

Pierre Breber: As you said, Devin, our guidance for fourth quarter is at the high end of the range, so that's a 3 billion annual rate or 750 million in the quarter. And as I said, last quarter, and I'll restate now, we'll increase the buyback range, when Chevron's net debt ratio was comfortably below 20%. We ended 3 -- third quarter with a net debt ratio, a little bit under 19%, down from 21% at the end of the second quarter. So we just got below 20%, but we're fast approaching a net debt level where we could increase the buyback range further. As a reminder, Devin, I know, you know this, we intend to maintain our buyback for multiple years through the cycle. And so we're positioning our Balance Sheet below our mid-cycle range so that will enable us to continue buybacks even if the cycle turns.

Devin Mcdermott: Got it. Very helpful, makes sense. Congrats again, on the strong quarter.

Pierre Breber: Thanks, Devin.

Operator: We'll take our next question from Neil Mehta with Goldman Sachs.

Neil Mehta: Yes, I just want to echo great results here. Pierre, I want you to take a moment to talk about the global gas market. You spend a lot of time looking at this over the years. How do you see it playing out from here? And there a lot of moving pieces as it relates to your gas portfolio. But one would be just any thoughts around spot cargos and the other would be it looked like you had some timing effects in the quarter that supported earnings. I would think that would unwind later -- later on, but just any modeling advice there. So a lot of moving pieces there, but your thoughts on the cash portfolio.

Pierre Breber: Thanks, Neil. First, I'd say that we are seeing high gas prices. It does feel more cyclical than structural. We've seen demand very resilient through COVID on natural gas in particular, and supply has been impacted in part by lower associated gas, just a slowdown in some supply activities. So seeing demand and supply a little bit out, I don't think it's something that we've seen in the past and we expect that markets will work. We're seeing a commodity pricing right now, and we expect markets to rebalance over time. We have a very strong natural gas business. We have a nice position in North America, Australia, Eastern Med through Noble Energy, and in Africa. And so we're well-positioned there. There's not much in the short-term that we can really do to increase supply. We have position in the (ph) and we could increase activity there. But that will have a modest impact on a Company of our size. I think over the medium to longer-term, we're working expansion opportunities and particularly in Eastern Med, and I think this is positive for signing up customers and enabling kind of the next, next phase of expansion there. So it's something that we're certainly well positioned for and we're looking to expand supply into it. In terms of the quarter, a couple of things, yes, we did have a trading a timing effect that was related to LNG. And that's really tied to how we manage our overall portfolio pricing, so we have customer contracts that are oil-linked and JKM linked, and then we have various supplies and we try to match up the pricing, And in order to do that, we essentially, went along with some JKM paper, which clearly was mark-to-market positive in the quarter. Now, that's going to be matched against some physical deliveries in future quarters. So we call that timing because we expect to see that unwind when those physical cargos are delivered. And then the last piece of guidance we had was really on fourth quarter earnings effects. We guided towards $50 million of increased earnings in 4Q versus 3Q from Australia LNG, spot cargoes. And that's just to make the point that we are going to have spot cargoes. We have all five trains operating, the Wheatstone plan turnaround is complete. And we'll have actually more cargoes delivered in fourth quarter when you think of contract and spot. But because it's heading into winter and most of our -- many of our customers on the Northern Hemisphere, their nomination seasonally pick up heading into the winter. And so they will have higher takes under the long-term contracts which are oil linked. And that means we will fewer cargoes getting the higher JKM prices. So higher prices clearly in JKM, 4Q versus 3Q, fewer cargoes, that's a net benefit of about 50 million. We also have some exposure out of our -- both Angola LNG and Equatorial Guinea, and so you can think about another 50 million or so from spot cargoes from those operations. So, sorry it's a long answer to cover the full breadth of natural gas this quarter.

Neil Mehta: Nah, that's a lot of moving pieces. Now, that's great. And , you're tracking really well on CapEx this year, now, I think, initially 14 then 13 now, it looks like as low as 12. Next year, if I remember, CapEx is 15-17 is the range that you talked about. Are -- Is it fair to assume that the lower capital spend this year would suggest that you'd be on the lower end of that range? And any moving pieces that we should think about as you set up the 2022 spend level?

Pierre Breber: You will see us increase capital in the fourth quarter just to get to that $12 billion to $13 billion because we're at $8.1 billion through third quarters. And you'll see that in the Permian, 2 more rigs, 2 more completion crews. We'll have higher activity levels at Tengiz. We're going to maintain peak manpower through the winter. And then activity tends to be back-loaded so -- back-end loaded. So we have some project milestone payments, we have exploration wells that we'll be drilling in the fourth quarter. So you'll see an increase in fourth quarter. I think we will announce our 2022 budget in December like we normally do. It'll be within the guidance and I think it's fair to say it will be towards the low end of the guidance. Again, even being at the bottom of the guidance of $15 billion of organic capital, that's at least a 20% increase off the midpoint of the guidance we just gave for this year. So, again, I don't want to get ahead of that, but you should expect us to see capital in the lower end of that guidance range.

Neil Mehta: Good stuff. Thanks, guys.

Operator: Thank you. We'll take our next question from Doug Leggate with Bank of America.

Doug Leggate: Well, thanks. Good morning, everybody.

Pierre Breber: Morning.

Doug Leggate: Pierre and Mark, thanks for taking my questions. Pierre, I hate to ask a housekeeping question, but you've got to help me out here a little bit on tax. The way I'm thinking about this is that there's been a lot of changes and post-noble, your mix has changed and obviously we've got a lot more profitability in the U.S. with overall tax rates. So can you help me is what's going on the tax sustainable over a mix issue or was there something unusual going on because as we saw your tax rate going up. I'm worried that we are carrying too high a tax rate going forward.

Pierre Breber: The tax benefits in the third quarter which we cited are real. So this is a deferred tax asset. It was acquired through Noble. At the time of closing the transaction, we put a valuation allowance against it because these taxes attributes have a -- they expire after a certain number of years, and based on projections of financial performance at that time, we thought they would expire without us being able to use them. Our financial performance is so much stronger that we actually were able to use them in the third quarter. So that reduces our taxes both on an earnings and on a cash basis. So it's very real and it's an additional synergy from Noble and it's not something that was included in our synergy estimates. That is not something that necessarily will recur, we'll do a review of all of our tax attributes at year-end, and see again what differed tax assets could have value going forward based on a change in condition. But, again, I would cite that, that was in the all other segment. It's not something that you would expect to recur.

Doug Leggate: That's really helpful, thanks. And then I suppose I can push you to quantify what our noble contribution was, right?

Pierre Breber: Well, it's the primary variance in that segment. So we talked about lower corporate charges and tax benefits.

Doug Leggate: All right. My follow-up is really on balance sheet issue, but obviously going back 5 years ago, you guys net debt as this is leaving a lot of projects going quiet back then. When you think about the cost of debt, which is obviously very, very low, and we'll see if it stays there, versus the way you think about per-share dividend growth. So I'm trying to think, Exxon talks now about 20% to 25% has been the right level for them. Excuse me, your head around, below that kind of level so what is the right level for you, given that, you can obviously refinance at very economic level and obviously, step up for buybacks, if you chose to.

Pierre Breber: When I became CFO, we -- I answered this question that we didn't have a hard target on our net debt ratio, but 20% to 25% is a good place for us to be through the cycle. And there could be times where we go above it. For example, when we showed our stress test, the only Company in the industry to show a stress test last year at $30 brand for two years, to give confidence our investors that we could maintain the dividend, our net debt ratio did go above 25%. So that's appropriate. We do not need to be anywhere close to where we were before with no net debt. But when prices are above mid-cycle, we should be below the low end of the range. And we are. We got to less than 19% now, and we're fast approaching a range where we could increase our buyback -- our buyback guidance. So it's very close to where we're at. All the excess cash that we'll be generating under these conditions, and we showed that at $60 even, prices well below where we're at now, that we can generate $25 billion of excess cash over 5 years. This is cash in excess of our capital and our dividends. All that cash will be returned to shareholders over time in the form of a rising dividend. And again, our dividend is up 12% since pre - COVID, the biggest increase in the sector. And a buyback that's rateable and we maintain through the cycle. We buy back shares 14 and last 18 years. And so when we set a buyback rate, we intend to maintain it through the cycle. That means we will maintain it when the cycle turns, and which means that we can in fact be doing it off of debt for some time period, and we'll rebalance back into the range, when we continue to buy back shares, when -- if and when the cycle does turn down.

Doug Leggate: Let's hope that's not anytime soon because last year is still -- we still got scars from last year Pierre. Thanks so much for your answers. I appreciate it.

Pierre Breber: Thank you, Doug.

Operator: We'll take our next question from Jeanine Wai with Barclays.

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

Pierre Breber: Morning Wai.

Jenny Wang: Good morning. We wanted to follow-up on Devin's question and I guess Dave's question as well, getting back to the buyback. Pierre, you have already commented that you plan to maintain the buyback through multiple years through the price cycle, which is great. I think we remember prior commentary that the goal is to not have to reduce the buyback once it's started. So we wanted to just check in on that and how you think that the trajectory of any buyback increases. It sounds more ratable versus opportunistic. We know there's a tremendous amount of free cash flow coming your way, but also it seems like investor expectations are running alongside that versus being more ratable, and that the strip is backward dated. So we just wanted to check on the trajectory.

Pierre Breber: Thanks Janeen, if you look back to our history, we've never ended a buyback program at the rate that we started. We tend to have increased them. And I think you might be right that we haven't decreased them. Look, I'm not opposed to that. We have a range. We're using the range. We were in the middle of the range in the third quarter. It's the first quarter that we -- since we've resumed buybacks. We bought back shares in the first quarter of last year, pre-Covid. And now we're using the top of the range. And as I said, we're fast approaching a net debt level, where we can increase that guidance range further. So no, our focus is on being ratable and maintain it through the cycle. Investors -- our investors, our shareholders, have different views on buybacks where we have the most common ground, is do it consistently, and do it through the cycle when times are good and when times are tougher. And so we're setting the rates at a level that we have confidence that we can maintain it through a commodity price cycle.

Jeanine Wai: Okay. Great, thank you for that. Our second question is really on the Permian and the outlook on capital allocation. Can you just talk a little bit about what you're seeing on inventory and supply demand, and maybe how close are you to potentially accelerating in the Permian, a little bit beyond of what you've already laid out? And I guess on that, we know that it doesn't get much attention, but could you also be thinking about increasing activity in other short-cycle plays? Thank you.

Pierre Breber: We're going to increase capital in the fourth quarter and into next year. And so that'll be in the Permian and they'll be in other locations. Again, as I said, even the bottom end of our guidance range $15 billion represents at least a 20% increase from where we expect to end up this year. And we're seeing that in the fourth quarter. We'll see 2 additional rigs in Permian, 2 additional completion crews. We are beginning to see a non-op pickup, also, again, that's part of the reason why we lowered our guidance. Non-op has been a bit below our expectations. And you can see it in other basins. We have a great portfolio with a number of short-cycle investments, but we're not changing our overall CapEx guidance range. Our CapEx guidance anticipated that we would be in a recovery mode and it would increase overtime. And we showed a 5 year outlook on the Permian that shows that we can grow production as an outcome of a very capital efficient and -- but also carbon efficient development of resource that we can grow that production from 600,000 barrels a day to 1 million barrels a day. So we're executing our plan. There's really no change in what we're doing. It's playing out the way we expected. And seeing a buildup in activity in the Permian and across other parts of our portfolio is what we had planned to do and we're going to do that in a very capital and cost efficient way.

Jenny Wang: Great, thank you.

Operator: We'll take our next question from Phil Gresh with J.P. Morgan.

Phil Gresh: Hey, Pierre. First question here, just kind of circling around the capital allocation piece a little bit more. Back in March, you talked about having 25 billion of excess cash or greater than 25 billion in excess cash over 5 years at 60, implicitly suggesting the dividend would be covered around 50 - ish brands I believe. I'm just curious if as you progress through this year, the performance that you've seen etc., has anything changed with that, to make you think that that break in would be moving lower, or is that still an area where you're comfortable with?

Pierre Breber: That's an area where we're comfortable with. It's just keeping oil prices constant, right? We're seeing Mark Nelson 's Downstream & Chemicals Group perform very well. We've talked about natural gas pricing being strong both in North America, Europe, and International LNG. So those things aren't held constant. So if you look at this quarter's result, I think you'd see our break even would be a little bit lower, but in terms of mid-cycle assumptions for refining margins, chemical margins, natural gas prices, and then an oil break even about 50 is certainly where we're at. Now that -- of course that changes as our dividend goes up and other things over time because it's a dividend break even is covering our capital and our dividend. But that math is still intact. We are a better Company than we were a few years ago. We showed that chart where our costs are lower, our production is higher, and we're much more capital efficient. We can sustain and grow this enterprise with less capital and that helps us deliver higher returns and lower carbon.

Phil Gresh: Got it. And then just a follow-up question on Wheatstone, there were some reports from your partners about reserves being written down there. I just wanted to get your commentary, how do you think about this? Does that mean something in terms of future capital requirements, given that it's a longer cycle project as any commentary you'd have there? Thanks.

Pierre Breber: It's unrelated to Chevron. So if you recall, the Wheatstone Project was the 1st project in Australia and maybe the world where there were third-party. The reserves, the resources came from two different joint ventures. And so it was Apache at the time and now it's Woodside. So it was really Woodside announcing that the fields that supply their portion of -- that's told through Wheatstone, that those reserves have a write-down. Chevron does not have an interest in those reserves so the fields -- the Chevron fields that supply Wheatstone are not affected. And again, it's unrelated to Chevron activity. It's only that they essentially -- we share the facility through them and those fields are also being processed through. Wheatstone is doing very well. We had a plan turnaround that covered a portion of third quarter and early into fourth quarter, as I said it was completed last week, and we expect to have all 5 of our Australia trains operating this quarter. And as I said, we expect more cargoes. There is a lot of focus on JKM, but of course our oil-linked contract prices will also be higher because they adjust with -- oil prices are higher, and then they adjust with oil prices on a 3-month to 6-month lag.

Phil Gresh: Great, thanks for the clarification there.

Pierre Breber: Thanks, Phil,

Operator: We will take our next question from Ryan Todd with Piper Sandler.

Ryan Todd: Thanks. Maybe a high level question and you did your energy transition spotlight event a little while back. You said a share of the capital budget at close to local run businesses, being close to 10% of the capital budget. You've seen one of your peers here in the U.S. raise theirs to a similar level. If you think about the feedback that you've received since then, our view was that it was a pragmatic balance between allocation of capital towards good low-carbon businesses but not too much to kind of protect returns dilution going forward. Is 10% of the budget do you see as -- as you've seen feedback over the last couple of months, do you view that 10% of the budget is enough, or do you think that's going to be something where you're going to see increasing pressure to kind of creep that higher going forward.

Pierre Breber: I'll start and then I'll ask Mark to talk a little bit about some of our renewable fuels activities in his portfolio. We have good shareholder support in alignment for our strategy and objectives of high returns, lower carbon. That's both lowering the carbon intensity of our traditional operations and then growing low-carbon businesses that leverage our strengths, our capabilities, assets, and customer relationships. And they target the sectors that cannot be easily electrified, the hard to abate sector. So this is things like air travel, industrial emissions, heavy-duty transport. The $10 billion of capital is connected to some pretty ambitious targets that go up to 2030. So 150,000 tons per annum of hydrogen, 25 million tons per year of carbon capture and storage. That's all consistent with that capital guidance. So we are more in the execution mode and getting it done versus, let's say competing on CapEx targets. It's not easy to do, these are ambitious targets. They have challenges, lots of opportunity, but let me ask Mark to talk a bit about his portion of that on renewable fuels.

Roderick Green : Thanks for the question, Ryan. I could use a real tangible example. You think about our El Segundo Refinery in our diesel hydrotreater conversion. We've said a few things are really important to us when it comes to renewable diesel. We've said that the ability to sell it at the appropriate margin, the ability to have the right kind of feedstocks, and the ability to be capital efficient is critical for us to be successful. In Southern California, in the El Segundo Refinery are an example of all of that. We've already increased our sales -- we're getting close to 40%, let's say over 30% of renewable and biodiesel in Southern California. We have our Bungie joint venture, where we're working towards definitive agreements as we speak, and yet they're already supplying us at the El Segundo Refinery. And finally, and perhaps most importantly,

Mark Nelson: capital efficiency. We indicated in our energy transition spotlight that we expect to be a leader in the capital conversion of particular hydroprocessing units in our system. And we believe we can do that for less than a dollar per gallon of annual capacity. And that's including any pretreatment requirements, that gives us the ability to produce both renewable diesel and conventional diesel just with a catalyst change, if that's necessary. So when you step back and you think about that work that's been done initially at El Segundo where we did our co-processing investment for very very little money, we were able to test tanking and piping and metallurgy needs, and now we're working towards a full conversion of that diesel hydrotreater here by the end of next year. That wont be easy, but the team is working really hard on it, making very good progress and that would be a 100% renewable diesel capacity and over 10,000 barrels a day. Thanks for the question, Ryan.

Ryan Todd: Great. Thanks, Mark, maybe a follow-up on some of your comments earlier, Pierre, where you mentioned, when you were talking about gas market and you mentioned the Eastern Med opportunities. You haven't talked about that much in a little while. In your conversations with potential buyers of that gas in the base, and I mean, in the past, when it was operated by Noble, it was -- there was a talk of everything between European targets to pipelines to Egypt, to floating LNG, and all sorts of opportunities. Any thoughts on what may look like it makes the most sense there in the Eastern Med and opportunities for whether it's shorter-term de - bottlenecking and an opportunity there versus longer-term project development?

Pierre Breber: All options are still on the table, Ryan, and it's commercially sensitive, so I don't want to show our hand in any way. I mean, the point is that this is a great resource. There's some very low-cost expansions that can be done and there's some larger expansions that can be done over time. What's really changed is that was in a geography that a year ago looked oversupplied for natural gas and now looks much tighter. And so as you know, natural gas business internationally is really dependent on getting customers to sign up. And I think customers are more motivated now and it's probably overdone as I said earlier, we expect the markets to correct, but it is a better time for us to be engaging. So it's a great resource in many cases is backing out coal, it has expansion opportunities and free cash flow positive from the moment that we closed Noble. So it's just a great asset and it's well-positioned now to have opportunities to grow in the future.

Ryan Todd: Great. Thank you.

Operator: We'll take our next question from Paul Sankey with Sankey Research.

Paul Sankey: Hi, everyone. Pierre, if I could start with you. Would it be possible to try and normalize your exposure to LNG given that there's so many moving parts over the course of the past year or so. I'm just noticing that you said during your comments that your spot exposure will be somewhat different in Q4 as a result of customers pulling long-term contracts. If we could just take the part of it and further normalize into 2022, 2023, where are your volumes and how much of that is going to be long -term versus spot? If you could have a go at that. Thanks.

Pierre Breber: Paul we'll cover that more in our fourth-quarter call when we give full-year guidance on a number of items, we have a long-term contract that will begin next year, so it will take are waiting too long term contracts a little bit higher again, we've been notionally around 80%. But that's something -- that's why we very consciously just provided guidance for this quarter as it will change a little bit next year, but we'll do that on the fourth-quarter call.

Paul Sankey: Okay. I'll move on to more. But if I could just slip a quick one of a few in regards to modeling, do I assume that we've put everything into buyback in terms of free cash flow, or are there any other items that you would highlight maybe pension with something that we should just be aware of going into 2022, and how much we consider your buyback to be? Thanks.

Pierre Breber: Over time the vast majority of the excess cash will be returned to shareholders in the form of higher dividend and the buyback. We did a one time pension supplement last quarter, it was really tied to the very low interest rates from a year ago. It sounds like a long time ago. But under the Pension Benefit Guaranty Corporation rules, the funding requirement is fixed by on the year-end interest rates. And so we were a little bit underfunded and therefore, would have paid a little higher, that's called a variable interest rate essentially, higher than our cost of borrowing, and so that's why we supplemented it. Obviously, we're in a much different place in terms of interest rates now, and you'd expect our pension contributions to be, has they have been. And we provide guidance on pension in our 10-Q filings. So I would not expect anything on that end. So, again, if you go to our financial priorities, Paul, you know them well. Sustain and grow the dividend. It's up 12% since pre-COVID, the biggest increase in the sector. Our capital guidance is going to be up, but it's no change from the guidance range and it's in a very tight guidance range and very capital efficient and lower where it was pre-COVID. We're going to pay down a little more debt. As I said, we're fast approaching a level where we can increase our buyback range. And so then, the balance is excess cash, and over time, it goes to shareholders. We're not going to sweep out each quarter because investors are very clear that they want us to maintain a buyback through the cycle.

Paul Sankey: I guess that would mean no specials.

Pierre Breber: I think it's time for you to ask the question to Mark.

Paul Sankey: Mark. Thanks. Thanks, Pierre. Mark, very general question, but could you talk about how capacity is changing Downstream, both in refining and in chemicals? Because I know we're adding a lot of Chemicals. Obviously we are also shutting down a lot of Downstream house. Seriously, is there any way that the Chevron 's dramatically changing its capacity and exposure Downstream? And secondly, could you talk about that in the context of where you see U.S. in global capacity? I know this could take two hours, apologize, but if you could generally say how global capacity shifted, and the more numbers you could give us, the better. Thanks.

Mark Nelson: Yeah, thanks, Paul. Let's start with the refining side of the business here. We've unused margin as the proxy for capacity being utilized here. We've said demand has to recover for high-value products. Inventory, we have to fall in the traditional ranges and then we need some degree of refinery rationalization, either closures or conversions throughout the system. If you're in the U.S. today, I think you're seeing much of that -- much of that demand recovery with Jet still to come and that's even with offices not completely open, and still some restrictions in place. Inventory tending to find itself in traditional boundaries and starting to see some closures and/or conversions in some of our markets especially the U.S. West Coast, which means the market could be -- could actually be tight on things like motor gasoline, and even Jet 5 or 6 years from now. So you see that in the U.S.. If I shift to Asia, I would say that demand recovery on Jet is a little bit behind that of the U.S. especially given our exposure to Southeast Asia. Inventory reduction, falling into those ranges is starting to happen, some of that with China stopping some of its exports for the moment. But demand catching up with refinery capacity in Asia is still needs to happen in that. That's means we both need some, perhaps some rationalization as well as demand just to catch up with the capacity that's there. And so my high-level comment would be that in the U.S., we're seeing the actions to bring refinery margins into balance over time getting closer to historic ranges in just a half phase behind that maybe, in Asia. And then for the petchem side of the equation, petchem margins have had a strong run this year on the back of good demand and considerable supply disruptions. We would expect to see margins come off as we get to the fourth quarter normal seasonal type of drop-off. But we're actually preparing for -- with capacity growth over the next few years. We expect that to outpace demand, so we're at that part of the cycle. And even in 2025, we're presuming we'll be on the lower portion of the margin cycle. So that means that there will be a period of catch-up there in regard to demand catching capacity. Hope I got to your quiz.

Paul Sankey: You did. Thanks, Mark. And just from a Chevron point of view, is there any major changes in your capacity over the next 5 years that you anticipate refining and chemicals? Thanks.

Mark Nelson: Other than the comments we've made about -- you remember it was about a decade ago that we didn't match of our what I'll call rationalization, meaning taking things out of our portfolio. And we've highlighted energy transition spotlight that we have this opportunity for this very capital efficient conversion of individual hydroprocessing units. And we will certainly do that over the next decade to get to that 100,000 barrels a day of our DSAF (ph) capacity.

Pierre Breber: Thanks, Paul. We're going to have to go to the next one.

Paul Sankey: Bye.

Mark Nelson: Thanks, Paul.

Operator: We're going next to Rodger Reed with Wells Fargo.

Rodger Reed: Thank you and good morning. Pierre, I'm going to hit you on capital returns, buybacks, and balance sheet. No I'm just kidding. Mark, I would like to ask you about the group oil-based three acquisition kind of how that fits in the overall structuring, and what we should think about there and whether or not we've seen some stories about renewable feed stock for Group 3, and maybe how you see that working in over time?

Mark Nelson: Yes. Thanks, Roger. As mentioned in the prepared remarks, we're excited about the announced acquisition of Neste's Group III Base Oil Business and the Nexbase brand, and the reason for that is, it's a very capital efficient acquisition of both offtake of supply, appropriate qualifications, and the brand -- index-based brand itself. And what that does for us is it allows us to expand our offerings. So we're going to add that to our existing Group II, II+ and over Novvi offering to have a complete offering for the base oil needs for our customers in the future. And think about that Novvi brand that we've talked about, I think in the Energy transition spotlight, we shared that Walmart would be selling online our Havoline Pro-RS, the first renewable lubricant line. And we've actually brought some of that forward. And starting next Monday, we will have our installer base in North America, specifically the U.S. and Canada, in particular, running a whole line of Havoline Pro-RS. So we're creating that demand for the renewable portion of that offering. And it really gives us something where we can be that supplier of the future for our base oil customers. Thanks for the question, Rodger.

Rodger Reed: Yeah, absolutely. And then if we could come back to some of the things on the CapEx, you've referenced delays out of the Gulf of Mexico due to the storms, which totally makes sense. As you look at the development and some of the exploration, I think you're looking to do out there in the next couple of years, is there any change to that or any sort of change in the order of projects we should pay attention to?

Pierre Breber: No, we have a steady stream of projects really with Anchor that has been underway. Whale that recently went to a final investment decision and Ballymore which is coming along. So you will see a very ratable development program. Gulf of Mexico is a high return, low carbon asset. Some of the lowest carbon intensity barrels in our portfolio in the single-digits. And is a business that we've been invested in for decades, have know-how, and competitive advantages and can find attractive investment opportunities. So it's sort of a modestly growing part of the portfolio. Do you think of the biggest growth that we have going forward clearly is in the Permian, which I referred to earlier, Tengiz, a project that we're investing in, and it's project is going very well and the project will come on in a couple of years, but when you get to Gulf of Mexico, the Rocky's or Colorado, a few other places are also have very attractive investment opportunities that can deliver both higher returns and lower carbon.

Rodger Reed: Thank you.

Operator: We'll take our next question from Biraj Borkhataria with RBC.

Biraj Borkhataria: Hi. Thanks for taking my questions. I have 2 questions. The first 1 was, just thinking about the Balance Sheet, because of your conservatism on the way you manage your Balance Sheet, you've been able to make some counter-cyclical moves and Noble was obviously the most recent one. Given we're at the high part of the cycle now, could you talk about any plans to accelerate asset sales? I know it's not needed for the Balance Sheet, but it's interesting to hear whether you can -- there any opportunities out there. And if so, although they are across Upstream, Downstream, or Chemicals? And then the second question is on Tengiz, it's good to see that the dividend come through after a number of years, are any loan repayments due in 2022? And then finally, just a quick comment and say thanks for the PCI calculation tool which you published. It's actually quite difficult to dig into some of those figures and understand all the variances. So I appreciate the transparency there.

Pierre Breber: Well, thank you Biraj for recognizing PCI. Our teams will be very happy to hear that. We wanted to make a tool that was transparent where you could use it for other companies because I know comparability is of interest to investors and so it's based on, again, transparent reporting data and comparability and so thank you for taking advantage of that and I encourage others to check it out. Let me just talk about TCO because as we look back, we had a very successful spring and summer campaign there. We hit our productivity targets and we achieved a lot of our milestones, and we had a full workforce. So we had a Delta variant wave which caused some higher levels of isolation in the middle of the third quarter. But we ended the quarter with positive rates very very low and we're back to our full workforce. And as I mentioned earlier, we intend to maintain a peak manpower workforce level through the winter months. We have a vaccination rate over 85% for that workforce so we're well-positioned to make a lot of progress this winter. Now, we have to be thoughtful about it because it can get cold there. So we're sequencing the work in a way that we're saving a work that can be done indoors or in sheltered locations during the coldest month of the winter. So no change clearly in the guidance that we provided on second quarter in terms of budget and schedule, but I wanted to give an update. Things are going very well in Tengiz and we're looking forward to a very productive winter season there. In terms of the dividend, you're right. It's the first dividend in 3 years, so that's nice to see. We did have a modest loan repay back that occurred last quarter. And look, we'll give guidance on 2022, just like with Paul's question, when we look forward. It will depend clearly also on oil prices, but that's something that will give guidance on our 4Q call. In terms of asset sales, yes, we acquired Noble when -- or announced the acquisition, when Brent was in the low 40s, and now Brent is in the low eighties. And so, it's a commodity business, it has cycles, ups and downs, and when you buy or sell assets, timing makes a difference where you are in the cycle. And of course, strategic fit and all the elements were very, very pleased with the Noble transaction. We talked about, the timing of it, the first to do it, the synergies that we doubled, and the tax benefits that we saw this quarter and interest cost savings. So we did tender a number of bond offerings earlier this month. A lot of those bonds are Noble bonds, again, that was not included in our synergies because we weren't quite sure we can achieve that. And we'll save over a $100 million in interest cost savings. So the Noble just keeps contributing to the Company, and that's part of the reason why we're a better Company now than we were several years ago. But it's a different market, so yeah, I view it more as a seller's market than a buyer's market right now. And so you're seeing us modestly increase some assets that don't compete for capital as well in our portfolio. In fact one of them is our position in the Eagle Ford. So that was a Noble legacy position, Chevron legacy was not in it. So we don't have quite the scale that we would like. But again, essentially buying that position at $40, and now we have it on the market that's in the public domain. And obviously we expect to get much higher value than for what was implied in the purchase price. We have some other U.S. onshore assets that are on the market, again, that we feel are very attractive to a lot of industry players, but just won't compete for capital as well in our portfolio. Thanks, Biraj.

Biraj Borkhataria: Okay. Understood. Thank you.

Operator: We'll take our next question from Paul Cheng with Scotiabank.

Paul Cheng: Hey, guys, good morning. 2 questions.

Mark Nelson: Morning.

Pierre Breber: Morning to you, sir.

Paul Cheng: The first one is for Mark. Mark, you guys, tipped the Pasadena Refinery and that the time you are saying that it's one-off, because you complement your Pascagoula Refinery. There's a lot -- quite a lot of refineries that's available for sale in here. So I want to see with the substantial amount of the refining capacity being shot, does it change the way that how you are looking at that business or that you think you already have sufficient of the capacity and supplementary, and you really don't need to add? And also the end of retail marketing, some of your peers that have been aggressively that building up and including in the US. And you guys have a walk that business for more than 10 years. And is there any trend to going back, so that on the energy transition, including in the EV charger and all that? The second question is for Pierre. You talked about say the TCO dividend, how about Angola LNG, can you give us some idea that if the current commodity price fall? So we assume every year that both Angola LNG and the TCO is going to pay the dividend. And any cost sensitivity you can provide that you have to change in the oil price, how the impact on that dividend payout going to look like?

Mark Nelson: Alright, Paul, thank you for the questions. I'll take them, again, in reverse order. I think your second question was really about retail marketing. And as you know, we have 3 world-class brands, and we've taken a capital light approach to selling our branded fuels. In fact, 1 of the metrics that we often look at is the Opus brand power rating and we continue to be well at the top of that list. And what that means is the majority of our retail sites around the world that you would see are owned by retailers who has specifically chosen our brand. And so we have our brand, our fuel and generally not our capital. We also happen to have one of the strongest retail convenience franchising offerings out there, extra mile that you've probably seen. In fact, I think we hit our 1,000th site, this year, with very very little attrition. And so we believe that our limited capital approach provides us the majority of the margin and sustainably delivered high returns, and still allows us to stay connected with customers. And as part of that offering to customers today, we have -- excuse me, EV charging stations in 7 countries around the world, and we're partnering with our retailers to continue to expand that offering as customers actually need it. Your second question was, I think about the refinery portfolio in general and maybe Pasadena specifically. We're very pleased with our refining portfolio today. And it's really because of that hydroprocessing capacity that we have across our system. It gives us flexibility to deal with the fuels of the future and renewable fuels in particular, in a very, very capital efficient way, specific to Pasadena. Again, we have an opportunity there. The premise of the acquisition continues to hold for us in processing our equity crude, being able to supply our own service stations in the Texas-Louisiana area. And then of course, having the intermediate back and forth between Pascagoula and Pasadena. That's all working as we would expect. And we've shared that we think there's an opportunity there to have very efficient expansion of light tight oil processing capacity, and we've hinted that that's going to be a hydro-skimming focus. We're working on that real hard and look forward to talking more about that next year. Thanks for your question, Paul. Now Pierre.

Pierre Breber: Yeah and on Angola LNG, so it's -- in our looking ahead flight Paul, we guide towards $300 million of return of capital. It's essentially a dividend, it just kind of an accounting characterization as it has returned to capital. It's cash, is the bottom align. And in terms of guidance going forward, and let me just say Angola LNG does sell into the spot market essentially both on oil link strips, and into Europe, TTF or international JKM markets. So it does have exposure, exposure to international natural gas pricing. 300 million will be a nice return on capital here in the fourth quarter. And again, just like with Paul Sankey's question, we'll provide guidance for our full LNG portfolio on the fourth-quarter call for 2022. That will include Australia, Angola LNG, and our interest in Equatorial Guinea, which is again, it's another asset that was acquired through Noble Energy. Thanks, Paul.

Operator: We'll take our next question from Manav Gupta with Credit Suisse.

Manav Gupta: Hey, guys 2 questions. I'll ask them upfront. The first one is, I'd like to pick your brain on the mid-cycle chemical margins here. Historically we thought the mid-cycle would be more like $0.25, obviously right now we're more like 65. And even though you did say no, the margins will decline, some of the bigger chemical ethylene players that are out there saying, "We will settle for the next 2, 3 years above the mid-cycle levels. " So while the mid-cycle could be 25, you could still see 35 to 40. So that's the first question, and the second question is you seem -- you get into the CNG distribution for the first time. And I'm wondering if this is associated with the strategy of developing RNG and basically controlling the entire value chain so you can distribute your RNG that you're pretty -- going to produce through your distribution network.

Mark Nelson: Thanks, Manav got your question. So first on petrochemical margins, we indicated as we look to the longest of terms we expect pet-chem demand to continue to grow in line with the long-term GDP growth. We believe, in the next 4 to 5 years, we do see capacity growth in the next couple of years going past demand. Which brings us to towards the bottom portion of the margin cycle. And so I think we shared in our Investor Day discussions last year that we brought our view down and it's -- and again erring on the side of conservative and, perhaps, but that it was going to be $0.20 per pound in regards to where we could expect those margins over time, and anything above that, of course, we will take it. And it drives us in our CPChem joint venture to make sure that we continue to work on our unit cost reductions, which they have done a very good job on and will continue to do going forward. And so we see that that is our number looking forward. And then I want to get to your comment on the R&G portfolio. You read it exactly correctly. Our close on the 60 American natural gas sites is really about us leveraging our strength. When we talked about renewable natural gas, we say a couple of things. We say it leverages our strengths and bio feedstocks are really important to strength in particular, our value chain activation, and partnerships. And the 2 areas where you can see this at play, actually in the formal presentation, would be in the gas that's now coming from CalBio from all of the farms that we have there. And then our Brightmark activity experiencing their first delivered gas on the 60 CNG sites that -- American natural gas CNG sites with , that allows us to follow the request of our customers, if you will. And we're trying to get the CNG to those customers throughout the -- our portfolio. And that's the first step in doing it in a platform for us to grow.

Manav Gupta: Thank you.

Pierre Breber: Thanks, Manav.

Operator: Thank you. Our last question will come from Jason Gabelman with Cowen.

Jason Gabelman: Yeah, thanks for squeezing me in. I may have missed it but, can you just discuss the drivers of why TCO is declaring this dividend now? And what we should look to assess if they will declare it next year, and just some background on how we could calculate that? And then my second question, just on cost inflation. What you're seeing across your projects, if it's impacting TCO at all, or any of your either large -- sorry, long-cycle projects or short-cycle in the Permian? Thanks.

Pierre Breber: Thanks, Jason. Yes. I should have mentioned, now TCO is paying a dividend. It was in the plan, but it could be higher than was planned, which is why we've guided to a range. Primarily because two things, one, clearly the macro-environment is stronger, so it is -- produces a light oil that attracts trades to a tight discount to brand and, with the fiscal terms and the rest of it, it's generating excess cash. And also we've seen at the project some real cost savings. Again, we've seen some deferrals, but that would be factored into retaining cash in TCO. But we've seen some underlying greater inefficient -- efficiencies and we've seen some foreign exchange benefits there. So it's a function of it, things going well both from a market environment and from an execution of the project. Again, in terms of 2022, we will provide guidance on the fourth-quarter call like we have in prior years, we've guided historically to that cash flow line, which is the difference between dividends and affiliate earnings, I think we also might just give separately a range on expected dividends from Tengiz and other major affiliates. And then, in terms of cost, we're not really seeing any cost increases. Rigs -- U.S. onshore rigs are maybe creeping up, but they're still well below where they were pre-COVID and in general, the industry is operating below capacity. So although there are pockets of goods and services that we use that are tied to the general economy, like steel and clearly steel is up. But the majority of our costs are tied to industry-specific major equipment, and that's still operating below capacity, so it could increase in the future, I know there's a lot of talk about it, but what we're seeing up-to-date is costs are well under control.

Jason Gabelman: Thanks.

Roderick Green : I would like to thank everyone for your time today. We appreciate your interest in Chevron and everyone's participation on today's call, please stay safe and healthy. Katie, back to you.

Operator: Thank you. This concludes Chevron's third quarter 2021 earnings conference call. You may now disconnect.