Exxon Mobil Corporation

Please stand by. We're about to begin. Good day, everyone. Welcome to this ExxonMobil Corporation fourth quarter 2018 earnings call. Today's conference is being recorded. At this time, I'd like to turn the call over to the Vice President of Investor Relations and Secretary, Mr. Neil Hansen. Please go ahead, sir.

Thank you. Good morning, everyone. Welcome to our fourth quarter earnings call. We appreciate your participation on the call and continued interest in ExxonMobil. This is Neil Hansen, Vice President of Investor Relations. Joining me on the call today is our Chairman and CEO, Darren Woods. As we'll discuss on the call today, we are very pleased with our performance in the fourth quarter and with our full year results. This was a quarter highlighted by continued value generation from our integrated business model, additional growth in liquids production, and successful high grading of our downstream portfolio. In addition, we made significant progress on investments that will generate long-term accretive value for our shareholders. After I review the quarterly financial and operating performance, Darren will provide his perspectives on our business, reflecting on 2018 and the year ahead. Following this, Darren and I will be happy to take your questions. Our comments this morning will reference the slides available on the investor section of our website. I'd also like to draw your attention to the cautionary statement on slide two and the supplemental information at the end of this presentation, which, starting this quarter, you'll notice includes a listing of significant non-operational events that impacted quarterly earnings. Moving to slide three, I'll now highlight the developments that influenced fourth quarter performance. Crude oil prices decreased during the quarter, with Brent down $7.51, and WTI down $10.62. Conversely, gas realizations were up in the fourth quarter, supported by strong LNG prices and seasonal demand. Entry hub was also up 74 cents. Production in the Permian increased another 12% relative to the third quarter and was up 93% from the fourth quarter of last year. Exploration success continued offshore Guyana with the Pluma discovery, our 10th find so far on the Stabbrook Block. The resource estimate in Guyana is now greater than 5 billion oil equivalent barrels. In Mozambique, we secured offtake agreements for the Ravuma LNG project as we progress toward a final investment decision which remains on track. Industry refining margins weakened across the globe with lower seasonal gasoline demand, and higher inventories. This was partly offset by stronger distillate margins. In North America, we successfully leveraged our logistics capacity to capture significant value by moving advantage crews from the Permian and Western Canada to our manufacturing facilities. We also started up the third of our six key refinery projects, the advanced hydrocracker at our Rotterdam refinery. This advantaged investment increases our capacity to produce higher-value products, including ultra-low sulfur fuels and Group 2 premium lubricant-based stocks. We continue to high-grade our downstream portfolio with the divestment of our Augusta refinery and related terminals in Italy and our Germany retail assets. While long-term fundamentals remain strong in the chemical business, margins weakened during the quarter. the supply length from recent capacity additions pressured realizations. We safely completed a turnaround at our Singapore facility and progressed integration of our Jurong acquisition with our nearby petrochemical complex. I'll now go through a more detailed review of fourth quarter results, starting first with the upstream on slide four. Fourth quarter upstream earnings were $3.3 billion. a $900 million decrease relative to the third quarter of 2018. The absence of favorable U.S. tax reform impacts and current quarter asset impairments negatively impacted earnings by $670 million. Crude realizations decreased by 18% during the quarter, with a decline in industry markers and wider North American differentials. The estimated unfavorable impact of those wider differentials on upstream earnings relative to the third quarter was $350 million. However, integration with logistics and manufacturing resulted in more than that value being realized in the downstream. Having takeaway capacity that exceeds our upstream production allowed us to realize a corresponding estimated benefit, again, relative to the third quarter, of approximately $600 million in the downstream. Gas realizations increased 18% in the fourth quarter on stronger LNG pricing and seasonal gas demand. An increase in production driven by continued volume growth in the Permian and seasonal gas demand in Europe contributed $660 million to fourth quarter earnings. Favorable foreign exchange effects and other items each positively impacted earnings by $100 million. Moving to slide five and a comparison of fourth quarter upstream production to the third quarter of this year. Production in the fourth quarter was 4 million oil equivalent barrels per day, an increase of more than 200,000 oil equivalent barrels per day. If you exclude the impact of entitlements and divestments, volumes were up 5%. as a result of seasonal gas demand and continued liquids growth. The absence of impacts from the downtime event that occurred earlier this year at Sincrood and volume growth in the Permian resulted in a 3% increase in liquids production in the fourth quarter. Natural gas production was up 11%, primarily due to seasonal gas demand in the Netherlands. Moving to slide six and a comparison of fourth quarter upstream earnings with the fourth quarter of 2017. If you exclude the effects of U.S. tax reform and impairments, earnings increased $1.2 billion. Higher prices increased earnings by $660 million, driven by a $2 increase in natural gas realizations, partly offset by a decline in crude realizations, and again, That resulted primarily from wider North American differentials. We estimate the unfavorable impact of those wider differentials on the upstream, again, relative to the fourth quarter of last year, to be approximately $750 million. The estimated corresponding margin benefit that we captured in the downstream from our fully integrated value chain was $1.2 billion, again, compared to the fourth quarter of last year. Liquids growth, driven by Permian and Hebron, increased earnings by $180 million. Favorable foreign exchange effects contributed approximately $80 million, while all other impacts increased earnings by $270 million. Those other items included favorable non-U.S. tax impacts and the absence of unfavorable one-time items from last year, and that was partly offset by some higher operating and expiration expenses. Slide 7 provides a comparison of fourth quarter volumes relative to the same period as last year. Liquids production increased 7 percent, excluding the impact from entitlements and divestments. That growth included a 93 percent increase in Permian production and additional volumes from EBROM. Now, while not shown on the page, I also wanted to highlight that full-year production was 3.8 million barrels per day. And if you exclude the effect of entitlement and divestments of approximately 130,000 oil equipment barrels per day, volumes finish the year essentially in line with 2017 levels and the guidance we provided at the March 2018 Investor Day. Now, moving to slide eight, I'll review downstream fourth quarter financial and operating results, starting first with a comparison to the third quarter of this year. Downstream earnings of $2.7 billion increased by $1 billion, with the capture of significant value from our North American integrated operations and portfolio high grading. Downstream refining margins weakened during the quarter. However, this was more than offset by the value we captured from North American crude differentials with our integrated logistics network. This allowed us to connect barrels to our manufacturing facilities, and contributed to a favorable margin impact in the downstream of approximately $500 million. We had higher scheduled maintenance in the quarter, which decreased earnings by $460 million. Proceeds from the divestment of Germany retail assets and the Augusta refinery and fuels terminals contributed $870 million to earnings. Improvements in refining yield and sales mix. supported by the startups of the Beaumont Hydrofiner and the Antwerp Coker, partly offset by some related expenses, contributed $70 million to earnings. All other items included favorable inventory impacts and tax items. Turning now to slide nine and a review of current quarter downstream earnings relative to the fourth quarter of last year. Again, if you exclude the effects of U.S. tax reform and impairments, downstream earnings were up almost $1.8 billion. Margins had a $550 million positive impact on earnings with significant value from wider crude differentials in North America. And in fact, we estimate a benefit across the integrated downstream value chain of approximately $1.2 billion relative to the same quarter as last year. This was partly offset by lower lubricants margins and lower refining margins in some regions. Significant reliability improvement was partly offset by higher scheduled maintenance, resulting in a positive contribution of $130 million. The divestment of the Germany retail assets and the Augusta refinery and fuels terminals, which was partly offset by the absence of a Norway retail divestment that occurred in 2017, contributed $680 million in the fourth quarter. Improvements in refining yield and sales mix with the startup of new refinery investments and a growing retail network in markets like Mexico, partly offset by some related expenses, resulted in a positive contribution of $200 million. All other items reflect favorable inventory impacts and tax. Turning now to slide 10 and a review of current quarter chemical earnings relative to the third quarter of this year. Fourth quarter chemical earnings were $737 million. Lower margins negatively impacted earnings by $110 million as polyolefins margins declined with lengthening supply from new industry capacity additions. We had a one-time non-U.S. tax impact that resulted in a positive contribution of $210 million. Other items included higher expenses from new assets and growth initiatives. Turning now to slide 11 and a review of current quarter chemical earnings relative to the fourth quarter of last year. Including the effects of U.S. tax reform and impairments, chemical earnings decreased $190 million from the prior year quarter. Lower margins resulted in a $350 million decrease. again driven by lengthening polyolefin supply with new industry capacity. An increase in polyethylene sales from new assets had a positive contribution to earnings of $100 million. Scheduled turnaround activities in Singapore, which we completed in the fourth quarter, had a negative impact of $90 million. The same one-time non-U.S. tax impact resulted in a positive contribution of $210 million, while All other items included higher expenses from new assets and growth initiatives. Slide 12 provides a review of sources and uses of cash. Fourth quarter earnings adjusted for depreciation expense, changes in working capital, and asset sales gains yielded $8.6 billion in cash flow from operating activities. And it's important to note that depreciation in the quarter was higher than the normal trend line. due to the previously mentioned current quarter asset impairments of approximately $700 million on a before-tax basis. We experienced a $1.3 billion negative working capital impact in the quarter. This was driven by an inventory build for planned maintenance in the downstream and some seasonal tax payments, mostly in Europe. Other non-cash items of approximately $1 billion included adjustments for gains on the fourth quarter divestments in Germany and Italy. As a reminder, although both the Germany and Augusta divestments occurred in the fourth quarter, we actually received the cash proceeds from the Germany divestment in the third quarter. Had those proceeds been received this quarter, our cash from operations and asset sales would have fully covered investments and distributions. Fourth quarter PP&E additions were $6.5 billion, driven primarily by increased activity in the Permian Basin. We also reduced debt in the quarter by $2.3 billion. I'll now move to slide 13, which summarizes full-year 2018 financial results. 2018 earnings, excluding the impacts from U.S. tax reform and impairments, were $21 billion, up 40 percent from the prior year. driven by higher prices, liquids growth, and the value from North American integration. Cash flow from operations and asset sales was $40 billion, including $4 billion in proceeds from asset sales. Now, that $4 billion in asset sales was slightly above the previous five-year average that we have of asset sales of about $3.3 billion. 2018 CapEx was $26 billion. $2 billion above the guidance provided at last year's Investor Day, largely driven by incremental acquisitions during the year, notably related to Brazilian Acreage in the upstream and the Indonesian Lubricants Company that we acquired in the downstream. Free cash flow after investments was $20 billion, more than enough to cover the $14 billion in dividends paid during the year. Debt ended the year at $38 billion, a $4.5 billion decrease compared to the end of 2017. Now, let me provide a few observations regarding the first quarter before I hand it over to Darren. Upstream volume should be largely consistent with fourth quarter levels. In the downstream, we are seeing significantly weaker industry refining margins with lower seasonal gasoline demand and excess production. In addition, the curtailments in Canada, coupled with additional logistics capacity coming online in the Permian, has led to much narrower crude differentials to start the year. While these changes will impact results versus the fourth quarter, they again demonstrate the advantage of integration. As opportunities open and close across the markets and along the value chain, we are positioned to capture them. Scheduled maintenance this year will be like what we experienced in 2018, with the level of activity in the first quarter similar to what we saw in the fourth quarter of 2018. Chemical margins are expected to remain under pressure as the market continues to work through supply length from recent capacity additions. We expect quarterly corporate and financing charges to be somewhere between $700 and $900 million. And finally, we do not expect any significant asset sales in the first quarter. At this time, I would like to hand it over to Darren.

Thank you, Neil. And good morning, everyone. Great to be on the call today. Let me just start by providing my perspective on the past year. I think as you all know and will recall, in March of last year, we laid out an investment plan to structurally improve the earnings and cash flow potential of our business. while improving our returns across a wide range of price environments. As I reflect on 2018, I am extremely pleased with the progress we've made on those plans. We not only delivered on our commitments for the year, we identified additional upside. The price environment in 2018 was unpredictable, which once again demonstrated the value of our integrated business model. We saw significant swings in commodity prices compounded by the transportation constraints in the Permian Basin in Western Canada. Our upstream integrated logistics and manufacturing position allowed us to avoid the impact of market dislocations and thus capture the full value of our barrels. This reflects a deliberate strategy to leverage the scale and breadth of our integrated business model, which certainly paid off in 2018. Against the backdrop of a fairly volatile margin and price environment, we met earnings expectations for the year and generated $40 billion in cash flow from operations and asset sales, the highest level since 2014. This, in turn, enabled us to fund our ongoing investment program, reduce our debt, and consistent with one of our longstanding priorities, increase the dividend. In 2018, we increased our dividend by 6%. marking the 36th consecutive year of increases. Central to our plans for growing value is the advancement of a portfolio of advantaged investments. Throughout the year, we continue to develop and rigorously test our investments to make sure that our company's competitive advantages were translating directly into project advantages, giving us some of industry's lowest cost of supply. Developments over the past year have reaffirmed our belief in the strength of our investment portfolio, which is the best we've seen since the merger of Exxon and Mobil. In fact, as we worked through the year, we identified significant upside to our plans, which brings me to a critical focus area of 2018, delivering on the project milestones for the plans that we laid out back in March. We remained extremely confident in our ability to deliver on our plans, And let me give you a brief overview of the advances that we made in 2018. I'll start with the upstream. Each of the five growth opportunities we outlined back in March saw significant progress over the year. In Guyana, our track record of exploration success continued with five additional discoveries during the year, resulting in an updated resource estimate of more than 5 billion oil equivalent barrels. With our success, we added another drill ship to accelerate the pace of exploration and appraisal drilling. We now see the potential for at least five FPSOs, producing more than 750,000 barrels per day by 2025. Another key focus for deepwater development is Brazil, where we have quickly built an industry-leading acres position. Since the Investor Day last year, we increased our acres position to 2.3 million net acres. In the Permian, we continue to expand and accelerate activities. We believe we have a unique opportunity here to bring the full strength of ExxonMobil to the development of unconventional resources, to bring scale, bring fundamental science and technology, bring large-scale efficient development, and bring an integrated, well-to-market approach. It's one of the reasons we moved XDO to Houston. to integrate their work and skills into the broader capabilities of ExxonMobil. It's why we believe our approach will deliver the lowest cost supply and give us a significant advantage over the rest of industry. As we've optimized our development with further drilling and delineation, we see additional upside, well beyond the growth trajectory that we shared previously. We'll discuss this in more detail in March when we meet at our investor day. We continue to make good progress on projects in our LNG portfolio. P&G and Mozambique remain on track for a final investment decision. We've also been working very closely with QP, our partner in Golden Pass, to advance that investment and look forward to announcing something here in the very near term. In the downstream, the widening crude differentials in North America are a good reminder for why it's important to keep our growth plans for the Permian integrated with our logistics and manufacturing footprint in the Gulf Coast. We've been very active in securing additional takeaway capacity for our production in the Permian, as well as putting plans in place to ensure that our logistics capacity grows in tandem with our production and refining expansions. To meet growing demand for higher value fuels and lubricants, we are progressing six major refining investments, all advantage versus industry. Over the past year, three of those facilities started up, namely the Beaumont Hydrofiner, Antwerp Delayed Coker, and the Rotterdam Advanced Hydrocracker. These projects significantly enhanced the earnings and cash flow capacity of our downstream business and positioned us well for the upcoming IMO spec changes next year. The remaining three projects are progressing in line with the plans that we shared in March. In our chemical business, we outlined plans for 13 new facilities to meet growing demand. Seven have been brought online. The remaining six are on schedule. We expect these investments to support a 30% growth in sales by 2025, driven by our proprietary technologies that provide advantaged products and applications. We made excellent progress towards this objective in 2018, with sales growth of 6%. As we said last March, all of our investments leverage some combination of our competitive advantages to deliver industry-leading returns. Technology almost always plays a critical role. A great example is our advanced hydrocracker project in Rotterdam. The project uses a first-in-the-world combination of proprietary process and catalyst technology to convert heavy intermediate streams into Group 2 base stocks, a significant upgrade. With this investment, Rotterdam becomes the only world-scale Group 2 base stock producer in Europe, and it supplements our Group 2 production in the U.S. and Asia, allowing us to more effectively serve our global customer base. We expect this one project alone to double earnings for the Rotterdam site, making it one of the most competitive refineries in Europe. As we speak today, the hydrocracker is up and running and producing on-spec product in line with our expectations. Let me shift now to 2019 and some key themes for the year ahead. Starting in the upstream, we expect to sanction a number of key projects, including the next two phases of Guyana, LISA-2, and PAYARA, as well as two significant LNG projects, Mozambique and Golden Pass. Let me just add here, too, that we advance the FID of PAYARA from the middle of 2020 to late 2019, again reflecting the development plans and the progress that we're making beyond the plans we laid out last year. Later this year, we plan to mobilize the FPSO for the first development phase in Guyana, putting us on track for an early 2020 startup. With the advances we've made in our Permian development plans, we expect to accelerate the pace of our investments and increase our production profile. Consistent with this, This week, we announced a final investment decision for the Beaumont refinery expansion, which will further add to our integrated Permian advantage. We also announced the formation of the link to Webster JV to progress the Permian long haul pipeline that will give both Baytown and Beaumont the industry's most efficient transportation link to the Permian. We brought three important refinery projects on in the back end of last year. In 2019, our focus will be on fully leveraging their advantages. In addition, we're going to continue our push into new growth markets like Mexico and Indonesia, ensuring that we capitalize fully on our brands. In the chemical business, we're on track for a mid-year startup of our Beaumont polyethylene expansion, further strengthening our position in the Gulf Coast. We also plan to FID two projects at Baytown that will produce Vistamax, which is a high-growth, high-performance propylene plastomer. and linear alpha olefins used in packaging oils, waxes, and other specialty chemicals. These projects, along with the others we've discussed, will allow us to continue to grow sales of high-value, high-performance products. As I step back and reflect on the opportunities we have across all three of our business sectors, I remain very excited by the potential to generate significant value for our shareholders. As you may have seen yesterday, We announced the formation of new upstream and project organizations. These new organizations will help to facilitate the successful delivery of our investment opportunities. The upstream is reorganizing into three companies, down from seven. The upstream oil and gas company will have five distinct global businesses. Each business will have full accountability for end-to-end results, from resource development to production to marketing. over the entire life of the resource, from discovery to abandonment. The Upstream Integrated Solutions Company will provide functional expertise to bring the full advantage of the company's scale, our technology, and experience to each global business. Third company, Upstream Business Development, will receive the Upstream strategy and activities to upgrade the asset portfolio through exploration, acquisitions, and divestments. This will increase the focus on portfolio optimization and ensure that we continue to aggressively pursue all available value-added opportunities, including divestments. We're also combining the project's organizations from the upstream, downstream, and chemical into one global projects company, which will allow us to more effectively leverage the company's proven project capabilities