Exxon Mobil Corporation

Please stand by. We're about to begin. Good day, everyone. Welcome to this ExxonMobil Corporation first quarter 2019 earnings call. Today's call 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.

All right. Thank you, and good morning, everyone. Welcome to our first quarter earnings call. We appreciate your participation and continued interest in ExxonMobil. is Neil Hansen, Vice President of Investor Relations. Joining me on the call today is Jack Williams. Jack is a Senior Vice President and member of the Management Committee with responsibilities for the projects organization and the downstream and chemical business lines. After I review the quarterly financial and operating performance, Jack will provide his perspectives on the quarter and give updates on the significant progress made in a number of of key areas across the business that will generate accretive value for our shareholders. Following Jack's remarks, we'll 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 the presentation. Moving to slide three, I'll now highlight our first quarter financial performance. Over the past few months, we made excellent progress on our growth projects with several key final investment decisions and continued exploration success. We also remain on track with plans to increase production in the Permian Basin to 1 million oil equivalent barrels per day by 2024. In fact, growth in the Permian during the quarter supported a 5% year-over-year increase in liquids volumes. The first quarter was also characterized by solid operating performance, including the successful execution of scheduled maintenance across a number of our downstream facilities. The impressive progress in the first quarter was achieved in a margin environment that for both the downstream and chemical business lines was extremely challenging. In addition, North American crude differentials narrowed significantly, eliminating the large arbitrage opportunities that our logistics allowed us to capture in the fourth quarter. So, while the fundamentals and demand growth that underpin our investments remain strong, near-term supply and demand imbalances pressured margins, in fact, in the downstream to the lowest levels we've seen in the last decade. Earnings per share for the quarter were 55 cents, including a negative 4 cent per share impact from asset impairments. All in all, The results were in line with our expectations, given the margin environment we experienced during the quarter. I'll now go through a more detailed view of developments since the fourth quarter, starting first with the upstream. Average crude oil prices were lower than the fourth quarter, with Brent down $4.56 and WTI down $4.22. Despite the decline in crude markers, ExxonMobil's liquids realizations increased by $2.32, driven by improved Western Canadian differentials. Gas realizations, on the other hand, were down in the first quarter, consistent with crude-linked LNG pricing lag and a 50-cent decline in Henry Hub pricing. Production in the Permian averaged 226,000 oil equivalent barrels per day, an increase of 19% relative to the fourth quarter, and more than double the average production we saw in the first quarter of last year. Exploration success continued offshore Guyana with three additional discoveries since the beginning of the year. In February, we announced discoveries at the Tilapia and Haimara wells, and the Yellowtail well, which we announced last week, marked our 13th discovery on the Stadbrook block. These discoveries add to the previously announced estimated recoverable resource of approximately 5.5 billion oil equivalent barrels. We also discovered a major natural gas reservoir with the Glaucus Well in Cyprus, made a final investment decision to proceed with development of the Golden Pass LNG project, and made significant progress on another key project in our LNG portfolio with the signing of a gas agreement with the P&G government to support the POPWA LNG expansion. In the downstream, industry refining margins weakened due primarily to excess gasoline supply. As I mentioned, North American differentials narrowed in the first quarter with increased takeaway capacity in the Permian and production curtailments in Western Canada. From an operational standpoint, we successfully completed a heavy slate of scheduled maintenance in part to prepare for the upcoming IMO 2020 sulfur spec change. We announced final investment decisions for the Singapore Resid Upgrade Project, the Folly Hydrofiner, and the Light Crude Expansion Project in Beaumont. These advanced investments will increase our capacity to produce higher value products, including ultra-low sulfur fuels and Group 2 premium lubricant-based stocks. Although fundamentals remain strong in the chemical business, margins were challenged during the first quarter, with supply length from recent industry capacity additions pressuring realizations. Supported by continued demand growth, our volumes in the chemical business increased by 100,000 tons. We also progressed a polyethylene expansion at Beaumont, which is on track to start up in the third quarter, and we funded three major olefin derivative projects on the U.S. Gulf Coast. Moving to slide five for an overview of upstream volumes. Production in the first quarter of 2019 was 4 million oil equivalent barrels per day, in line with the production in the fourth quarter of last year. Again, production in the Permian increased by 36,000 oil equivalent barrels per day, a 19% increase, bringing total production in the Permian to 226,000 oil equivalent barrels per day in the first quarter. This impressive growth was more than offset by lower curl output and natural field decline. Looking at first quarter production relative to the same period as last year, shown on the bottom left chart, liquids volumes increased 5%. Growth of 126,000 oil equivalent barrels per day in the Permian drove volumes higher. The absence of the PNG earthquake and lower maintenance in Canada and Qatar also contributed to an increase in volumes. Warmer weather in Europe led to lower seasonal gas demand, but again, overall, volumes were higher by more than 90,000 oil equivalent barrels per day compared to the first quarter of last year. Moving to slide six and a review of first quarter results compared to the fourth quarter of 2018. First quarter earnings of $2.4 billion were down $3.7 billion. Upstream earnings were down approximately $400 million, driven by the impact of fewer sales days in the quarter, higher maintenance and downtime, notably at Gorgon, and the absence of various one-time items that impacted our fourth quarter results. Downstream earnings decreased by $3 billion, with several factors contributing to the lower results. narrowed North American differentials, lower industry margins, the absence of fourth quarter asset sales in Germany and Italy, and derivative impacts. And I'll provide more details on these drivers on upcoming slides. Finally, the chemical earnings were lower by $200 million, primarily driven by the absence of a favorable non-U.S. tax item in the fourth quarter, and chemical margins remained under pressure with recent industry capacity additions. Turning to slide seven, I'll expand on the business drivers that impacted our downstream results, again, relative to the fourth quarter. Downstream results for the first quarter were a loss of $256 million, a decrease of $3 billion compared to the fourth quarter of last year, driven by the absence of the Germany retail and Augusta refinery asset sales, and unfavorable margin impacts of approximately $2 billion. These unfavorable margin impacts are in line with the drivers that we previously communicated, with the largest impact due to narrowing crude differentials, again mainly in western Canada, that resulted in about half of the unfavorable margin impact. In addition, industry refining margins were lower, driven by excess gasoline supply and a tightened clean-dirty product spread. Finally, the absence of favorable Mark-to-market derivative impacts in the fourth quarter, which were the result of a declining oil price environment, combined with the unfavorable impact in the first quarter as a result of a rising oil price environment, resulted in a negative book margin impact of more than $600 million quarter-on-quarter. On slide 8, I'll provide a more detailed view of the current margin environment in the downstream. The chart on the left of the page plots industry refining margins over time and clearly shows that the industry is inherently volatile. In the first quarter, industry refining margins were among the lowest we've seen in the last 10 years. Low conversion margins were relatively strong, supported by fuel oil and distillate. However, high conversion margins were challenged. Wheat, gasoline, naphtha, and LPG crack spreads. High refinery utilization drove oversupply of these products. Slide 9 provides some additional perspectives on the current chemical margin environment. Again, the chart on the upper left there shows the amount of polyethylene capacity added by year since 2009 compared to the annual growth in demand over that same period. Chemical demand remains strong. and is expected to grow at approximately 3% per year, or 1.2 times global GDP. However, recent capacity additions have outpaced demand, depressing global PE margins, as shown on the bottom left chart. On the U.S. Gulf Coast alone, the industry has added nearly 5 million tons of capacity since 2017, in great part to capture the advantage of low-cost ethane feedstock. As a result, polyethylene margins have declined by approximately 45% since 2015, reflecting the cyclical nature of the chemical business. Moving to slide 10, which provides a review of our cash profile for the first quarter. First quarter earnings, when adjusted for depreciation expense and changes in working capital, yielded $8.3 billion in cash flow from operating activities. We experienced a $1.3 billion working capital release during the quarter. This was mostly due to higher seasonal payables balances, which were primarily tax-related, and an inventory release in the downstream. This occurred as we drew product inventories built prior to planned maintenance turnarounds. Other non-cash items had a negative impact of approximately $1 billion, which most notably included the reinvestment of equity company earnings as part of the 10 GEEs expansion project. First quarter additions to PP&E were $5.9 billion, driven primarily by increased activity in the Permian Basin. Total capital expenditures were $6.9 billion, in line with the 2019 CapEx guidance that we provided at the Investor Day in March. Earlier this week, the Board of Directors declared a second quarter cash dividend of 87 cents per share, representing a 6% increase from last quarter, and marking our 37th consecutive year of per share dividend growth. Gross debt increased by approximately $3 billion in the quarter, and cash ended the quarter at $4.6 billion. Now, before I turn it over to Jack, let me provide a few observations regarding this second quarter. In the upstream, we expect lower gas volumes driven by seasonal demand. I'll provide a little more detail on this on the next slide. In the downstream, we expect industry refining margins to recover with higher seasonal gasoline demand and heavier industry maintenance, which is common this time of the year. North American crude differentials, however, are anticipated to remain near first quarter 2019 levels. Scheduled maintenance in the second quarter in the downstream will be similar to what we experienced in the first quarter. Chemical margins are expected to remain under pressure as the market continues to work through supply length from recent capacity additions. And like the downstream, scheduled maintenance in the chemical business in the second quarter will be significant. I'll provide some additional details on scheduled maintenance in a few slides. But first, let me provide some more detail on seasonal gas demand on slide 12. The chart on the left there shows the negative impacts we typically experience from lower gas demand in Europe in the second quarter. As you know, gas demand is highly seasonal and driven by weather. Second quarter gas demand is on average 200,000 oil equivalent barrels per day lower than the first quarter of the year, and we expect a similar trend to occur this year. Turning to slide 13, I'll provide some perspectives on our second quarter outlook for downstream and chemical scheduled maintenance. As we previously communicated, scheduled maintenance in the downstream in 2019 will be higher than normal, and again, partly in preparation for IMO 2020. We expect the impact from scheduled maintenance in the second quarter to be broadly in line with what we experienced in the first quarter. The estimated earnings impact for the second quarter for the downstream is shown on the upper left chart. In the chemical business, again shown on the bottom left chart, and as I indicated, we expect to see significant scheduled maintenance with the impact in the second quarter similar to the amount we saw in the entire second half of 2018. Hopefully that provides you with some helpful perspectives on key drivers of our expected performance for the upcoming second quarter. At this time, I'd like to hand it over to Jack. Okay, thank you, Neil.

Well, as Neil covered, it was a tough market environment for us this quarter. Overall, though, we are pleased with the underlying operating performance of the businesses and And of course, wish that margin environment would have supported the translation of that into higher earnings. But as you saw in the downstream margin plot that Neil showed, the margins were at historically low levels and our results were in line with that margin environment. The plot also demonstrated the historical volatility of downstream margins and the wide swings that can happen over pretty short periods of time. And that's why we don't try to predict or forecast margins. Instead, we work to build our businesses to be robust to the swings and while we test new investments across a broad range of prices. Investments we're currently pursuing across all three sectors stand up to that testing and are advantaged versus industry. That's going to help us manage through this volatility and it's going to deliver value in markets that remain fundamentally strong. Our activities to execute those new investments remain on track, and some significant progress so far this year that Neil has mentioned. I'll just reiterate. In the upstream, we doubled Permian production volumes from the first quarter of last year and made three new discoveries in Gahanna. I feel really good about the strong portfolio of upstream investments that we have today, which are at the top tier of industry. As you know, a strong opportunity pipeline is critical given the depletion nature of the upstream business. In the downstream, we FID'd three major refining projects, and the other three of the six projects that I've been talking about are now online. These investments improve the yield profiles at strategically important sites, delivering higher value products that are growing in demand. And in chemicals, we also funded three projects, three major U.S. Gulf Coast olefin derivative projects, and are making good progress with the Corpus steam cracker, which we expect to FID around mid-year this year. And when we do that, that'll be our 12th FID of the 13 investments that underpin the chemicals growth plan and allow us to maintain a strong position in our performance product markets. And finally, we're continuing to see value from our integrated business model, and we're really pleased that our new upstream and projects organizations are now up and running. So with that, let me provide a few activity highlights, starting with the Permian. As you can see on the left-hand graph, we're continuing to track our production outlook. This volumes ramp is supported by a strong well inventory. In fact, by the time we reach a million barrels a day production level in the Permian, we'll have only drilled about half of our current well inventory. We're running 46 rigs there and we'll be ramping up through the year. And this level of rig activity allows us to develop multiple horizons in either full or half sections concurrently, which reduces the risk of parent-child well performance issues as all wells of possible communication will be fracked before any are produced. The development with this method requires blocky acreage and a large rig fleet and a long-term commitment to deal with lumpier production profiles. And we have all three. In addition to this drilling activity, we're building out our unique infrastructure in the Delaware with the first phase facilities at the central delivery point in our southeast New Mexico acreage being ready by year end. So, good progress in the Permian. and also in Guyana. Last week, we announced a new discovery in the Yellowtail 1 well, which, as Neil said, was our 13th discovery on the Staybrook Block. You can see in the map on the left that this discovery is in the Turbo area, which is going to be a large development hub similar to LISA. This well, along with Haimara and Tilapia discoveries, are going to add to the 5.5 billion oil equivalent barrels recoverable resource estimate that we announced earlier this year at our investment day. And our drilling continues. Development drilling of 17 wells for producing the first phase of LISA is progressing well and should be completed in the third quarter. The other rigs will continue drilling exploration and appraisal wells, including further drilling on the Hammerhead and Ranger discoveries. The construction of the LISA Destiny FPSO vessel for phase one It's being completed in Singapore with plans to sail away this summer and should be in Guyanese waters in the third quarter. The larger LISA Phase II development, designed to produce 220,000 barrels a day, is in the permitting phase and is planned for a 2022 startup. So, you know, lots of activity, exciting new discoveries, really good development progress in Guyana. Let me switch gears and talk about a few downstream project updates. Starting in Singapore, I've spoken about the Singapore Resid project before, and it has now been FID. This project is upgrading Resid to higher quality distillates and Group 2 lube-based stocks, which will be unique in industry. No one has ever upgraded heavy fuel oil streams into Group 2 lube-based stocks. This project is taking a notional $60 a barrel product and upgrading it to a $140 a barrel product. It's an industry first, and it's made possible through proprietary process and catalyst technology. It's the largest of the six major refining projects that we have, and due to its technology advantage, it's expected to generate a high team's return. And this project is really a great example of several of the competitive advantages that we spoke about last March, or back in March. It's made possible by new, unique technology. We filed for 35 patents related to the catalyst and novel processes that will be used. And it's a very large project. It's upgrading 90,000 barrels a day of fuel oil, which really moves the needle on site profitability. So clearly, this project's leveraging our scale. It's a terrific example of integration. Singapore is our largest integrated site globally. With this project, we're upgrading both refinery and chemical resid streams with two different but complementary technology solutions. In fact, I mentioned this is a downstream project, but you ought to think about this as an integrated downstream and chemical project. It significantly improves the competitiveness of the Singapore refinery. and reduces the supply cost of our crude cracker below any other liquids cracker in Asia. Startup's plan for 2023. So now let me talk about a project we haven't talked much about, and that's at Foley. Our project at Foley is the last of the six key refining projects that I introduced to you back in 2018, and it's also now fully funded. This project is more straightforward than Singapore. It leverages advantage logistics, and like our Rotterdam and Antwerp projects, is tightly integrated with the Northwest Europe refining and chemical circuit. It improves our refining profitability in two important ways. First, it upgrades the product slate to better match the UK market, so more ultra-low sulfur diesel, more jet fuel, more lower sulfur MOGAS. which reduces both imports and exports from the site. And second, the project expands Foley's logistics into the heart of the UK market, allowing for increased product flow into our west London terminal, which services nearby Heathrow Airport. So the combination of these two aspects will make Foley the most efficient and most competitive fuel supply into the greater London market. And this combination also translates into an expected project return in the high teens. So, again, switching gears beyond projects, another activity we've been focused on is the optimization of our entire value chain, both in lubricants and in fuels. We've continued to get some questions on our trading activities, so I thought I'd add some context, especially since it was a reconciling earnings factor this quarter. On the left is a summary of our global footprint from equity production to refining capacity through logistics to our branded retail sites. Our assets span the globe and the entire value chain. Our objective is to ensure our shareholders capture the full value of that chain from the reservoir to the gas tank and of our footprint from U.S. to Europe to Asia. So no matter where the value is realized along the chain, or around the world. So we are using asset-backed trading to best achieve that objective without speculating. For example, closing MoGas arms from Europe to the Americas or providing storage for products when logistics temporarily tighten. We are basically improving the utilization of our global assets and generating solid value from these activities. although sometimes it's difficult to see quarter on quarter due to changing mark-to-market impact from our open derivative positions, which was certainly the case this quarter. So to wrap up, we're continuing to leverage our competitive advantages of scale, technology, integration, functional excellence, and, of course, our high-quality workforce to grow shareholder value. We have made good progress towards our growth plan so far this year with further exploration success and project FIDs. We remain focused on continuously improving our base business while making investments across the value chain to grow earnings and cash flow across a broad range of price and margin environments. And finally, as evidenced by the additional exploration success in Guyana, we continue to be reminded that there's still a good bit of upside to this exciting growth plan that our company's on. So with that, let me hand it back to Neil to kick off our Q&A session.