Chevron Corporation (CVX)
2013 Security Analyst Meeting Conference Call
March 12, 2013, 09:00 am ET
Jeff Gustavson - General Manager, IR
John Watson - Chairman & CEO
Pat Yarrington - VP & CFO
Mike Wirth - EVP, Downstream & Chemicals
George Kirkland - Vice Chairman & EVP, Upstream & Gas
Jay Johnson - President, Chevron Europe, Eurasia & Middle East Exploration & Production Co.
Paul Sankey - Deutsche Bank
Ed Westlake - Credit Suisse
Evan Calio - Morgan Stanley
Paul Cheng - Barclays Capital
Jason Gammel - Macquarie Research
Blake Fernandez - Howard Weil
John Herrlin - Societe Generale
Arjun Murti - Goldman Sachs
Doug Leggate - Bank of America
Faisel Khan - Citigroup
Allen Good - Morningstar
David Wheeler - AllianceBernstein
Previous Statements by CVX
» Chevron's CEO Discusses Q4 2012 Results - Earnings Call Transcript
» Chevron Management Discusses Q3 2012 Results - Earnings Call Transcript
» Chevron Management Discusses Q2 2012 Results - Earnings Call Transcript
» Chevron Management Discusses Q1 2012 Results - Earnings Call Transcript
Before we begin today's program, I have a few important reminders. First, and in the interest of safety, I ask that you take a moment to locate the nearest exit. In the event of an emergency, the St. Regis Hotel staff will provide further instructions. Second, please silence all cell phones and other digital devices. And finally, remember to take your badge with you if you leave the room. You will need it in order to reenter.
During the program today, we will provide a comprehensive update on Chevron. We will begin with both corporate and financial overviews followed by more extensive discussions about our major business segments both upstream and downstream.
Our agenda features presentations by our Chairman and Chief Executive Officer, John Watson; our Vice President and Chief Financial Officer, Pat Yarrington; the Executive Vice President of Downstream and Chemicals, Mike Wirth; the Vice Chairman and Executive Vice President of Upstream, George Kirkland and Jay Johnson, the President of our Europe, Eurasia and Middle East E&P Operating Company. Jay will join George in discussing some of our longer-term upstream growth opportunities.
We will take a few questions at the conclusion of Mike’s segment and a brief break will follow. We have also set aside more time for questions later in the program followed by a short reception. Other executives here with us today include, Rhonda Zygocki, the Executive Vice President of Policy and Planning and Steve Green, our Vice President of Policy, Government and Public Affairs.
For those joining via webcast, I would like to invite you to participate in the Q&A segment. Please submit your questions to us by 11 A.M Eastern Time through the investors section of the company's website which can be found at chevron.com.
And finally, today's presentation contains estimates, projections and other forward-looking statements. I encourage you to take a few moments to review the Safe Harbor statement which is available in the appendix of your booklets and on our website. Thanks for your attention.
I would now like to introduce our Chairman and Chief Executive Officer, John Watson.
Alright, thanks Jeff, well good morning. I would like to welcome everyone to our 2013 Security Analyst Meeting. We actually look forward to this very much every year as it’s a great opportunity for us to showcase the company's recent performance as well as our plans for the future.
I would like to start things off by providing a quick summary of some of the key messages I would like you to take away this morning. First, we continue to deliver industry leading results. Our safety record is world-class and our financial performance leads the peer group and other significant competitors. Second, our business strategies remain well aligned with the needs of a growing world economy that requires more energy in all forms. Third, our upstream growth plans have target 3.3 million barrels per day in 2017 are on-track. In fact, we're confident growth will continue beyond this date. Finally, we continue to be focused on execution across all aspects of our business.
Superior execution is fundamental to delivering top-tier financial and operating results. Excellence in execution starts with our operational excellence management system that I described in some depth at this meeting two years ago. The discipline of this system has driven strong performance in health, environment and safety.
AGEAS performance starts with personnel safety. On any given day, we have more than 250,000 employees and contractors working in our business and we had just 70 injuries that required a day away from work all year, or 0.03 for 200,000 hours work. That’s not just the best in the industry, its world class performance. Of course, we're targeting zero and have shown we can get there in many business units for extended periods of time.
We also have a sharp focus on process safety. That's keeping oil and gas in the pipes, tanks and vessels designed to contain it. One measure of success in process safety is spill volume. This chart shows this data for us and major competitors. In 2012, we had our lowest spill volume ever and we lead the industry and on a broader measure of process safety, each of the last three years we've reduced what are called Tier 1 loss of containment events. We are proud of our progress, but we are not at zero. We investigate and learn from incidents and those of others and then make improvements to our processes and procedures. We understand that stakes are high and the tolerance low for events that impact people or the environment; we’re working to eliminate them.
Now let’s look at our financial performance; 2012 was another strong year for the company. Earnings exceeded $26 billion for the second time and we posted return on capital employed approaching 19%. Strong earnings supported sizable increase in the dividend, our 25th consecutive annual increase. High cash flow enabled $5 billion in share repurchases and a $34 billion capital program directed at high return investments. We did all of this while maintaining the industry’s strongest balance sheet.
Per share earnings are also important of course, and on a five year index measure, you can see we lead by a wide margin; in fact if you look at the same measure across a broad array of industry players including almost all of the independent E&P companies, you will see the same pattern where we lead.
Earnings and earnings per share growth have been strong, but we also have value and profitability in the barrels we produce and sell. This chart shows earnings per barrel for our upstream and downstream businesses. In the upstream, we have led the peer group for three consecutive years, and by a margin of more than $5 a barrel, George will talk more about upstream performance later and why we expect to sustain this leadership. And downstream has moved up near the top of the pack as we completed our; Mike will close the book on that effort and tell you what’s next for downstream and chemicals. The superior performance comes from strong execution of our business. This includes prudent project selection, sound project design and execution and reliable ongoing operations.
With weaken performance in performance and operating and financial metrics it should come as no surprise that we lead on total shareholder return as well. This is our fourth consecutive year I have been able to tell you we lead our peer group and the S&P 500 in five-year TSR. We lead for most other periods as well including the 10-year interval also shown on this chart. These are big gaps for annualized numbers that translate to huge value creation differences for our shareholders.
Our strategies are designed for long-term value, so they don't change very often and are unchanged since last year. I covered strategy in depth last year, so I’ve just a couple of comments today. Note the last phrase in our upstream strategy says we intend to build new legacy positions. We define legacy assets as large, long life resource bases where we can apply our technology and know-how to unlock value overtime. George will show you that an increasing proportion of our portfolio is composed of legacy assets. Jay will talk about some new opportunities that we have to create additional long life assets.
Our strategies have being consistent because the macro environment continues to support them; in spite of some lingering uncertainties, the world economy will continue to grow and living standards will continue to improve. And to fuel those improvements, we will need more affordable energy in all forms. Over the next couple of decades, energy demand will grow about a 1.5% per year and in all major fuel categories. Oil and gas will continue to represent more than 50% of the energy supply.
We remain bullish on oil as a valued commodity. World demand for it continues to grow and spare production capacity remains just 4% of supply. Key mature fields continue to decline in output and large scale replacement has above ground risks that can slow development; risks such as security, fiscal terms, domestic content requirements to name just a few.
We are also bullish on LNG. Demand for natural gas will grow more rapidly than for other fuels. But there is a growing disconnect between supply and demand centers necessitating movement of much more gas across oceans in the form of LNG. And we believe there will be a challenge to meet the supply requirement. Let's look at this in a little more detail.
This chart shows LNG demand has more than doubled since 2000 and is expected to double again by 2025. The low growth periods the next five years is due to supply constraints as few projects were sanctioned during the financial crisis. Demand growth in Japan, Korea and Taiwan will be low but steady; with few energy alternatives LNG is vital to meeting their needs. These countries have high quality experienced buyers and they face the supply replenishment requirement as natural reservoir decline will occur in fields to support existing contracts. China and India are expected to show the strongest growth. These two countries are expected to increase their combined LNG imports by 10% per year for the next decade. Emerging markets elsewhere in Asia will also see rapid growth as local gas supply is outstripped by demand.
Finally, traditional markets in Europe will see continuing demand for LNG in part to maintain supply diversification. If we take the demand curve I just showed and compare it to LNG supplies either producing today or under construction you can see a potential supply shortfall in 2025 of almost 150 million tons, that's 10 Gorgons and probably $0.5 trillion in investment. There are a number of projects being proposed to fill this gap. They are large and complex. Most face political and other impediments which can result in delays. It’s certainly true for LNG exports from the United States.
Given the large capital requirements long construction lead time and obstacles to development, there are only a handful of companies that have the financial and operating capability to take on LNG projects. And they will require a fair return on their investments to do so. This will necessitate long-term purchase contracts with robust underlying LNG prices. You will hear from George and Jay about the progress we are making on some of our key LNG projects, Gorgon, Wheatstone and our newest addition to the LNG portfolio, Kitimat LNG in Canada.
Now we've put together a video which features time lapse segments to demonstrate the significant progress we are making on some of our most important major capital projects. Let's take a look at that.
Amazing projects and that’s just a small sample of what we do, I do have one update George told me just a few minutes ago that the big footholds is the rising Corpus Christi, so it’s no longer in-route there. So I hope that does give you a bit of a feel for the big projects that we have underway, George, Jay and Mike will share more specifics of course a little bit later.
So the business environment for our business remains strong and we are continuing to advance our growth plans we first outlined in early 2010. We said then that we plan to grow upstream production to 3.3 million barrels per day by 2017. Last year, we showed you this chart that indicated the projects that underpin this objective were well defined. You can see our confidence is greater today; more than 90% of the 3.3 target production comes from fields that are online today or tied to projects that are under construction. The remainder is in short cycle projects and you will hear later that our deep project queue will deliver growth beyond 2017.