WEBVTT - Chevron CEO Mike Wirth Talks Earnings, Energy Valuations

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<v Speaker 1>Join us now for more is Mike Worth. He is

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<v Speaker 1>the CEO of Chevron. Mike, it's great to speak to

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<v Speaker 1>you today, and I want to talk about the fact that,

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<v Speaker 1>of course you did beat estimates the premium basin obviously

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<v Speaker 1>a bright spot there. But then there's the fact that

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<v Speaker 1>what's Texas crewed, for example, can't seem to reliably break

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<v Speaker 1>above seventy dollars per barrel as we read. Of course

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<v Speaker 1>you are planning cost cuts, but how do you thread

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<v Speaker 1>the needle between bringing those costs down without sacrificing margins

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<v Speaker 1>too much.

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<v Speaker 2>Well, Katie is good to be with you this morning,

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<v Speaker 2>and we did report a good quarter. We had strong

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<v Speaker 2>operational and financial results. We started up some key projects

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<v Speaker 2>in the Golf of Mexico, and we returned record cash

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<v Speaker 2>to shareholders. In fact, production was the highest third quarter

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<v Speaker 2>ever in the history of our company. Was the highest

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<v Speaker 2>US production we've ever seen, and highest production in the Permian.

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<v Speaker 2>And we started a big new project in the deep

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<v Speaker 2>water Golf of Mexico.

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<v Speaker 3>And have more to follow.

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<v Speaker 2>We're going to increase production there from two hundred thousand

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<v Speaker 2>barrels a day to three hundred thousand barrels a day

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<v Speaker 2>by twenty twenty six and over seven and a half

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<v Speaker 2>billion dollars return to shareholders through our dividend and share

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<v Speaker 2>repurchase program. In a commodity business, we need to be

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<v Speaker 2>prepared for cycles, and so capital discipline always matters. Cost

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<v Speaker 2>discipline always matters, and we can't control commodity price, and

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<v Speaker 2>it's very difficult to anticipate commodity price, so we have

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<v Speaker 2>to prepare for down cycles. WTI and frankly, all the

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<v Speaker 2>different commodities across our sector right now are seeing some pressure.

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<v Speaker 2>But that's you know, that's inherent in our business and

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<v Speaker 2>we're ready for that. We're built to win in any

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<v Speaker 2>price environment with downside resilience and upside leverage, all.

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<v Speaker 1>Right, built to win. Let's talk a little bit more

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<v Speaker 1>about the Permian basin. It was interesting to see that

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<v Speaker 1>your production there hit a new quarterly record. I know

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<v Speaker 1>that you have a target for a million barrels per

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<v Speaker 1>day from the Permian. When next year do you anticipate

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<v Speaker 1>that you could hit that?

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<v Speaker 2>Well, we've you know, any monthly or quarterly production is

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<v Speaker 2>a function of drilling activity and when you bring you

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<v Speaker 2>bring wells online.

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<v Speaker 3>We've got a strong track record here.

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<v Speaker 2>We've grown the Permian production at a fifteen percent compound

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<v Speaker 2>annual growth rate over the last three full years. I

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<v Speaker 2>expect will be up even more than that. Here in

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<v Speaker 2>twenty twenty four. In the quarter we just completed, we

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<v Speaker 2>were at nine hundred and fifty thousand barrels a day,

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<v Speaker 2>and so it's very very clear that we'll reach a

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<v Speaker 2>million barrels a day. It doesn't matter that much which

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<v Speaker 2>month that occurs in or which quarter. We're on a

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<v Speaker 2>strong ramp towards that. And the key thing is we're

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<v Speaker 2>getting more efficient in everything that we do. We get

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<v Speaker 2>better growth and better response for every dollar of capital

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<v Speaker 2>that we spend.

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<v Speaker 3>We're investing in new technologies.

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<v Speaker 2>That allow us to produce more out of every well

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<v Speaker 2>that we drill, and so all of that accruis stronger

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<v Speaker 2>margins irrespective of the price environment than we otherwise would

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<v Speaker 2>have had. And one differentiating thing about the portfolio that

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<v Speaker 2>we have in the Permian is across most of our acreage,

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<v Speaker 2>we have zero or very low royalties that are payable

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<v Speaker 2>to others because we own most of that property, which

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<v Speaker 2>is a bit unique. And so you put all that together,

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<v Speaker 2>and the Permians a critical asset for our company and

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<v Speaker 2>drive strong returns and a big part of the free

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<v Speaker 2>cash flow growth story.

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<v Speaker 4>I also want to go to efficiency a little more.

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<v Speaker 4>I know you've told analysts that cost efficiency is near

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<v Speaker 4>to your heart, and you have a flagged possible job

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<v Speaker 4>cuts in the latest plan to reduce costs as well.

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<v Speaker 4>I know that there could be asset sales as well.

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<v Speaker 4>You mentioned new technology, But as it pertains to jobs

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<v Speaker 4>in particular, how should investors employees be thinking about how

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<v Speaker 4>many jobs could be reduced in the United States.

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<v Speaker 2>Well, I think it's premature to speculate that. What we've

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<v Speaker 2>talked about is two to three billion dollars in structural

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<v Speaker 2>cost reductions over.

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<v Speaker 3>The next couple of years.

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<v Speaker 2>Some of that will come from portfolio actions where we

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<v Speaker 2>take cost out and move some assets out of the portfolio.

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<v Speaker 2>A good portion of that will come from productivity improveds

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<v Speaker 2>and the application of technology to do things at lower cost,

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<v Speaker 2>so it will come out of our supply chains. And

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<v Speaker 2>then some of it will come from changes in how

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<v Speaker 2>and where we execute work. That is where it could

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<v Speaker 2>impact people. But it's early for us to be very

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<v Speaker 2>definitive about that. We've got work underway to define that

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<v Speaker 2>as those projects in network is further along, we'll speak

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<v Speaker 2>more about that first and most importantly to our workforce

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<v Speaker 2>and then to investors. So I would say stay tuned,

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<v Speaker 2>but don't read the intent to continue to become more

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<v Speaker 2>cost efficient, which is inherent in a commodity business and

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<v Speaker 2>something you can never step away from as only being

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<v Speaker 2>about jobs.

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<v Speaker 3>It's about much, much more than that, and jobs are

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<v Speaker 3>a small part of the total.

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<v Speaker 4>I want to also ask you about the capital return

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<v Speaker 4>plans here, because the decision to tap into debt to

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<v Speaker 4>return money to investors through the form of buybacks. How

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<v Speaker 4>long can you maintain the current buyback schedule and what's

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<v Speaker 4>the optimum debt level for you to take on in

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<v Speaker 4>order to do so, especially in the face of volatile

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<v Speaker 4>oil prices.

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<v Speaker 2>Sure, so we can sustain the current level of distributions

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<v Speaker 2>for a long time. We've got a discipline set of

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<v Speaker 2>financial priorities that we've had for decades. First and foremost,

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<v Speaker 2>to grow the dividend, and we've done that for thirty

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<v Speaker 2>seven consecutive years.

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<v Speaker 3>We don't cut our dividends since the Great Depression.

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<v Speaker 2>The second is to reinvest cash flows to grow future

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<v Speaker 2>cash flows. The third is to maintain a strong balance sheet,

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<v Speaker 2>which I'll come back to, and the fourth is to

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<v Speaker 2>return access cash to shareholders once we've satisfied those first

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<v Speaker 2>three needs. Sixteen of the last twenty one years we've

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<v Speaker 2>returned cash through share repurchases, a very consistent and rtable program,

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<v Speaker 2>not only when times are good, but through the cycle,

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<v Speaker 2>and we're very under levered at this point. Our net

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<v Speaker 2>debt ratio right now is less than twelve percent. In

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<v Speaker 2>the fourth quarter, it's likely to go down even further

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<v Speaker 2>as we complete some asset sales and continue to see

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<v Speaker 2>strong cash flow generation in our core business, could be

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<v Speaker 2>back down into the single digits through the cycle.

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<v Speaker 3>We've guided to.

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<v Speaker 2>A range of twenty to twenty five percent net debt

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<v Speaker 2>as something that we think is appropriate to maintain the

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<v Speaker 2>strong double A credit rating that we currently have. And

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<v Speaker 2>so in a commodity business, there are times when your

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<v Speaker 2>cash flow is in excess of your dividends, your capital

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<v Speaker 2>and your shary purchase needs. There's other times when it

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<v Speaker 2>doesn't meet those which is why you have a very

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<v Speaker 2>strong balanceing and a lot of capacity so that you

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<v Speaker 2>can stay consistent through these cycles, which is what our

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<v Speaker 2>track record has demonstrated and certainly what our commitment to

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<v Speaker 2>our shareholders is.

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<v Speaker 1>And Mike, I just counted again, we're four days away

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<v Speaker 1>from the presidential election. So of course I have to

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<v Speaker 1>ask you a little bit about policy here, because when

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<v Speaker 1>Americans head to the polls, I'm curious what's at stake

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<v Speaker 1>for the US energy industry, what's at stake specifically for Chevron,

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<v Speaker 1>especially when you think about long term investment decisions that

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<v Speaker 1>you might be made.

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<v Speaker 2>Well, the most important thing for a long cycle business

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<v Speaker 2>like ours, where we allocate capital over years and decades

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<v Speaker 2>and have assets that operate for many decades, is to

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<v Speaker 2>try to seek some consistency in energy policy and to

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<v Speaker 2>try to help shape policy that balances economic competitiveness and

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<v Speaker 2>prosperity with energy security.

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<v Speaker 3>And with environmental protection, and not to.

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<v Speaker 2>Over index on any one of those at the expense

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<v Speaker 2>of the others. And so good policy is balanced, It

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<v Speaker 2>encourages investment to keep our economy strong, to keep our economy.

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<v Speaker 3>Secure, and to protect the environment.

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<v Speaker 2>And so whatever the outcome of the election, those are

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<v Speaker 2>the messages that we will take to the new administration,

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<v Speaker 2>and we'll sit down and engage on things that we

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<v Speaker 2>think are good for the US economy and allow us

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<v Speaker 2>to continue to invest in this country.

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<v Speaker 1>Appreciate the context there. I do also want to talk

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<v Speaker 1>about your share price. I mean it's not just Chevron,

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<v Speaker 1>like the entire energy industry really trades at a discount

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<v Speaker 1>relative to some of the other sectors in the S

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<v Speaker 1>and P five hundred, such as big tech. And that's

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<v Speaker 1>on the cusp of of course, record oil production in

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<v Speaker 1>a lot of cases, of course, the progress that you're

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<v Speaker 1>making in the Permian, for example, What do you think

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<v Speaker 1>investors are missing about the energy story or not appreciating.

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<v Speaker 3>Well? I think your points are very good. One.

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<v Speaker 2>Our weighting in the S and P is roughly half

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<v Speaker 2>of our earnings or cash contribution to the S and P,

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<v Speaker 2>and so multiples and valuations in the sector are low.

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<v Speaker 2>I think a decade ago that was a function of

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<v Speaker 2>the fact that there wasn't a lot of cash being

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<v Speaker 2>returned to shareholders by many companies. Most of the cash

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<v Speaker 2>or all of the cash was being reinvested in growth.

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<v Speaker 2>I think the industry has changed. We don't see that

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<v Speaker 2>condition today. We see companies that have become much more disciplined,

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<v Speaker 2>that have robust dividend and.

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<v Speaker 3>Share repurchase histories.

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<v Speaker 2>Now they're building ours has gone back over many decades,

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<v Speaker 2>but the industry has, I think now begun to exhibit

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<v Speaker 2>those same characteristics, and I think shareholders are beginning to

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<v Speaker 2>take another look. The other question I think that has

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<v Speaker 2>weighed on the market has been the duration.

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<v Speaker 3>Of future cash flows.

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<v Speaker 2>A lot of talk and a lot of interest and

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<v Speaker 2>commitment to evolving the energy system to one that's a

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<v Speaker 2>lower carbon energy system, but what I think investors haven't

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<v Speaker 2>fully grasped is that that doesn't mean that the age

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<v Speaker 2>of oil and gas is ending anytime soon. Hydrocarbons represent

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<v Speaker 2>more than eighty percent of global energy supply today, roughly

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<v Speaker 2>the same number that they did twenty years ago, and

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<v Speaker 2>as you look out many decades into the future, that

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<v Speaker 2>mix may change, but it will change slowly, and that's

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<v Speaker 2>against the backdrop of an energy demand that will continue

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<v Speaker 2>to grow.

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<v Speaker 3>And so the duration of these cash.

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<v Speaker 2>Flows are much longer than I think they're being discounted

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<v Speaker 2>into the valuations of the stock, and it's a real

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<v Speaker 2>opportunity for investors to rewait into the sector with the

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<v Speaker 2>strongest companies, and we're beginning to see some of that,

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<v Speaker 2>but I think there's a long way to go.

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<v Speaker 1>All right, Mike, that feels like a good place to

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<v Speaker 1>leave it. Really appreciate you taking the time to speak

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<v Speaker 1>to us this morning. That is Chevron CEO Mike Worth