Exxon Mobil Corporation

Please stand by. We're about to begin. Good day, everyone. Welcome to this ExxonMobil Corporation second 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. Good morning, everyone. Welcome to our second quarter earnings call. We appreciate your participation on the call today and your continued interest in ExxonMobil. This is Neil Hansen, Vice President of Investor Relations. Joining me today is Neil Chapman. Neil is a Senior Vice President and member of the Management Committee with responsibility for the upstream. After I review financial and operating performance, Neil will provide his perspectives on the quarter and give updates on the substantial progress we've made on the major growth projects across the business. Following Neil'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 this presentation. Moving to slide three, let me start first by summarizing the solid progress we've made on our major growth plans along with other noteworthy accomplishments. Neil will go into more detail after my remarks but I wanted to take a few moments to touch on some key highlights. In the first half of the year, we've made good progress on our growth plans. The fundamentals and long-term demand growth that underpin our investments remain strong. The competitive advantages we've built into our projects make them robust across commodity price cycles, including the margin environment we are currently experiencing. We reached final investment decisions for nine major strategic projects in just the first six months of the year, including projects from all three business lines. Offshore exploration success continued with four significant deepwater discoveries, three in Guyana and one in Cyprus. And we achieved key milestones in the development of two of our LNG growth projects in Papua New Guinea and Mozambique. Liquids production increased significantly from last year, with volumes up 144,000 barrels per day, or 7%, driven by strong growth in the Permian. We remain on schedule with plans to increase production in the Permian to 1 million oil-equivalent barrels per day by 2024, as we also continue to build out supporting infrastructure and takeaway capacity. In the downstream and chemical businesses, Recent project startups in North America and Europe are already making a positive contribution to results. These projects are accretive to earnings, even in the current margin environment, demonstrating the market resiliency we envisioned when making these investments. In particular, the Baytown Steam Cracker, which started up last year, has performed exceptionally well, with production exceeding design capacity by 10%. Lastly, we increased the quarterly dividend by 6%, marking the 37th consecutive year of dividend growth. Positive momentum we generated in the first half of the year is in line with the plans we laid out in 2018 and reiterated in March, and positions us very well to generate long-term shareholder value. I'll now highlight our second quarter financial performance starting on slide four. Earnings were $3.1 billion in the quarter, or 73 cents per share, including a positive 12 cent per share impact from a tax rate change in Alberta, Canada. These results were in line with our expectations, given the margin environment, seasonal impacts, and planned maintenance we experienced during the quarter. The margin environment remained challenging in the second quarter, as short-term supply and demand imbalances continued to pressure natural gas prices and industry product margins. Cash flow from operations and asset sales was $6 billion in the quarter, after adjusting for changes in working capital, which were primarily seasonal in nature and consistent. CapEx for the quarter was $8 billion, and through the first half of the year, CapEx is $15 billion, representing 50% of the full year guidance we provided in March. The free cash flow deficit in the second quarter is a result of our strategy to focus on the long term and grow shareholder value across commodity cycles, leveraging our financial capacity. I'll now go through a more detailed view of development since the first quarter on the next slide. Starting first with the upstream. Average crude oil prices were higher than the first quarter, with Brent up $5.63 and WTI up $4.93. ExxonMobil's liquids realizations increased by $5.09, in line with the increase in crude markers. Gas realizations, on the other hand, were down in the second quarter. This was consistent with the typical three to six month crude linked LNG pricing lag that we experience and a 51 cent decline in Henry Hub pricing as production growth continues to outpace demand in the U.S. Gas realizations were also impacted by weaker prices in Europe with lower seasonal demand and an increase in LNG imports. Production in the Permian averaged 274,000 oil equivalent barrels per day, an increase of 21% relative to the first quarter. Permian production is up nearly 90% from the average production we saw in the second quarter of last year. In addition to three exploration discoveries in Guyana in the first half of the year, we recently completed construction of the FPSO for Lysa Phase I, the Lysa Destiny, which is now in transit to Guyana. We also made a final investment decision for the 220,000 barrel per day Flies of Phase II project, and we updated the resource estimate to more than 6 billion oil equivalent barrels. We also progressed toward a final investment decision for the Mozambique LNG project by securing approval of the Rwumba development plan from the Mozambique government. We announced plans to expand unconventional operations in Argentina's Vaca Muerta Basin, and expanded our growing deepwater exploration portfolio, including the acquisition of 7 million deepwater exploration acres offshore Namibia. In the downstream, industry refining margins improved during the quarter, but remained near five-year lows. Unrelated reliability events at the Baytown, Sarnia, and Yambu refineries negatively impacted second quarter results. We expanded our Group 2 lubricant base stocks portfolio with increased production from the Rotterdam hydrocracker and a further expansion in Singapore. Although long-term fundamentals remain strong in the chemical business, paraxylene margins weakened during the second quarter as a result of supply length from recent industry capacity additions. We achieved another important milestone in our plans to grow high-value premium chemical product sales with the startup of the polyethylene expansion at Beaumont, which will capture integration benefits with the Baytown Steam Cracker and, once lined out, is expected to be accretive to earnings and cash flow in the current margin environment. We also announced a final investment decision for the Gulf Coast growth venture in Corpus Christi, where, with our partner, SABIC, we will construct a 1.8 million ton per year steam cracker and derivative units. We continue to progress research and development of lower emissions technologies. In the quarter, we signed a joint development agreement with Global Thermostat to advance breakthrough technology to capture and concentrate carbon dioxide emissions from industrial sources, including power plants. We also initiated a partnership with the Department of Energy's National Renewable Energy Laboratory and National Energy Technology Laboratory to research and develop a range of low-emissions technologies with a specific focus on ways to bring biofuels and carbon capture and storage to commercial scale. Both of these important efforts are aligned with our focus on leveraging fundamental science to develop breakthrough solutions that can help reduce global emissions. Let's now move to slide six for an overview of second quarter earnings relative to the first quarter of the year. Second quarter earnings of $3.1 billion were up nearly $800 million from the first quarter. Upstream earnings were up approximately $400 million, driven by higher liquids realizations and one-time tax items. partly offset by lower natural gas prices. Downstream earnings increased by more than $700 million due to improved fuels margins, wider North American crude differentials, and the absence of negative mark-to-market derivative impacts. Improvements in downstream earnings were partly offset by the previously mentioned reliability events. And finally, chemical earnings were lowered by $330 million with higher scheduled maintenance and weaker paraxylene margins. Turning to slide seven, I'll expand on the impressive year-over-year increase in upstream volumes. Production in the second quarter of 2019 was 3.9 million oil equivalent barrels per day, an increase of more than 260,000 oil equivalent barrels per day relative to the second quarter of last year, representing a 7% increase. The higher volume was driven by production growth of 129,000 oil equipment barrels per day in the Permian, which represents an 89% increase from the prior year quarter. Increased production from Hebron and Kayombo also contributed to the higher volumes. Lower maintenance in Canada and the absence of impacts from the earthquake in Papua New Guinea, combined with stronger seasonal gas demand in Europe, provided additional volume uplift. The bottom left chart highlights the strong year-over-year liquids growth of 177,000 barrels per day, an increase of 8% from the second quarter of 2018. Importantly, this marks the highest quarterly liquids production since 2016 and the highest second quarter liquids production in a decade. Moving to slide eight, I'll review the second quarter 2019 cash flow. Second quarter earnings, when adjusted for depreciation expense and changes in working capital, yielded $6 billion in cash flow from operating activities. There was a $1.2 billion draw on working capital in the quarter, driven primarily by lower seasonal payables. This impact is in line with the typical seasonal pattern of a working capital draw in the second quarter, which has been on average about $2 billion over the last decade. Other items included the impact from the Alberta tax rate change, which resulted in a non-cash benefit to earnings of approximately $500 million. While no significant asset sales have completed year-to-date, asset marketing activities are in line with our divestment plans and consistent with our expectation of generating $15 billion from asset sales by the end of 2021. Second quarter additions to PP&E and net investments and advances were $6.9 billion, driven primarily by increased activity in the Permian Basin. Gross debt increased by approximately $4 billion in the quarter, and cash ended the quarter at $4.2 billion. As I've discussed and as you can see, we are leveraging our financial capacity to invest in advantaged value accretive projects through the commodity price cycle. This is an important element of our strategy, so let me provide some additional perspective on the next slide. The chart at the top left of the page provides a view of commodity prices and margins over the past 10 years and the relative position of the environment we've seen in the first half of 2019 to that range. While margins so far this year have been on the low end of the 10-year range across many of our businesses. These levels are consistent with historical experience and, importantly, consistent with the scenarios that we anticipate when we make investment decisions. In fact, even in today's market environment, as mentioned, the recent chemical and refining project startups that I previously highlighted are contributing positive earnings and cash flow. The cyclical nature of these businesses makes it critically important to have the financial capacity to invest across commodity price cycles and grow the dividend. Over the past several years, we've taken advantage of these downturns in commodity prices to assemble the best set of opportunities that we've had in 20 years, and we are now investing consistent with our strategy to capture value from those opportunities. This combination of financial capacity to invest through the cycle and a deep portfolio of attractive investments is unique in industry. The chart on the bottom left of the page highlights our annual free cash flow generation over the past several years. Cumulative free cash flow over this time period is well in excess of our cumulative dividend. This provided a strong basis to make value accretive investments and grow the dividend over time. We view those two efforts as being closely linked together. The ability to grow the dividend requires continued investments in accretive, resilient opportunities across price cycles. During times of price volatility, we keep the long-term in mind, as there can be a number of opportunities to capture incremental value by investing when others are pulling back. With our financial strength and a competitively advantaged portfolio, we've been able to invest countercyclically in a number of key growth areas, taking advantage of attractive, low-cost environments. I'll now provide some perspective on our outlook for the third quarter, starting on slide 10. In the upstream, we expect volumes in the third quarter to be in line with the second quarter. We will also see the impact of the absence of the second quarter one-time non-U.S. tax help of approximately $500 million. In the downstream, we expect Permian crude differentials to narrow as additional takeaway capacity comes online. Industry refining margins are expected to be in line with seasonal demand patterns. Scheduled maintenance in the third quarter should be significantly lower relative to the second quarter. Chemical margins are expected to remain under pressure. as the market continues to work through supply length from recent capacity additions. Consistent with the downstream, scheduled maintenance in the chemical business in the third quarter is also expected to be lower. I'll provide some additional details on scheduled maintenance on the next slide. As we've previously discussed, scheduled maintenance in the downstream this year will be higher than normal, in part due to preparation for IMO 2020. Plan maintenance and downtime tends to be seasonal, in line with demand patterns. And consistent with this, we expect the impact from scheduled maintenance in the third quarter to be lower relative to what we experienced in the second quarter. And then in the fourth quarter, we anticipate maintenance activity to pick up as we enter into the fall maintenance season. But activity, again, should remain below second quarter levels. The estimated earnings impacts for the third and fourth quarter for the downstream are shown on the upper left chart. In the chemical business, shown on the bottom left chart, we also expect lower scheduled maintenance, with the impact in the third and fourth quarters below what we saw in the second quarter. We hope this provides you with some helpful perspectives on key drivers of anticipated market and plan factors for the upcoming quarter. And with that, at this time, I'd like to hand it over to Neil.

Good morning, everyone. It's good to be back on the call. As Neil said, before we take your questions, I'd like to share my perspective on the second quarter results. Then I'm going to provide a few updates to the plans that we laid out in our New York March discussions. I want to start by acknowledging the strong liquids growth. As I've said many times, volume is not a target. It is an outcome of our plans to grow value. Nevertheless, Our liquids growth reflects well on the organization maintaining the schedule in the early stages of executing our upstream growth plans. In terms of those growth plans, the ones we laid out in New York, I feel we're making outstanding progress. Permian growth is strong and on schedule. Guyana project plans are on or slightly ahead of schedule. And in the downstream and chemicals, 11 of the 19 projects that we laid out in New York last year are online, and we FID'd another six in the second quarter. I'm going to provide some further details on these in the following slides. We are in a unique position versus the rest of industry. We have a very attractive opportunity set. These are the advantage projects that are robust at the bottom of the cycle conditions. So we have a very attractive opportunity set, and we have the financial capacity to pursue them in a business that is very cyclical. In the second quarter, three of our major businesses were at low points in their cycles. As you heard from Neil, that's been a major factor in our quarterly results. While we obviously prefer margins to be at the top of the cycle, The current margin scenario was contemplated, and we have the financial capacity to maintain our plans. In fact, we built our growth strategies based on a full range of potential industry margins and the impact they would have on our financial results. That is why we put such importance on having a strong balance sheet to enable us to proceed with our long-term investment plans and weather through the cyclical nature of our business. On the whole, our businesses performed extremely well during the second quarter. Actually, they have in the first half of the year. Chemicals and upstream reliability has been excellent, and refining has also been strong, with the exception of the three discrete incidents, the one in Sarnia, Canada, one in Yanbu, Saudi Arabia, and the one in Baytown, Texas that Neil referenced. Although these are one-off and not systemic to our overall performance, in total, We estimate the second quarter impact from these three incidents to be of the tune of $150 million of earnings. That's the earnings impact. Of course, this is disappointing. Baytown and the Yanbu facility are now back in full production, and Sarnia will be at marginally lower rates through the fourth quarter. I want to take this opportunity to update you on the fire that occurred at our Baytown olefins plant earlier this week. First and foremost is the safety of our people and those in the surrounding community. I'm pleased to say there were no reported serious injuries. An investigation into the cause of the incident and the potential damage continues. And frankly, at this stage, it's really too early to say much more than that. On the larger point of reliability, of course, it's an important focus area for us. It has been for a long time. We benchmark extensively and our downstream facilities are ranked consistently better than the industry average. However, we must eliminate the significant one-off events as we're just not satisfied with being an above average industry performer. We're progressing a comprehensive reliability improvement program that we initiated late last year. This is leveraging insights across our upstream refining and chemical businesses and is also reaching out to leaders outside of our industry to ensure that we leave no stone unturned in our drive to lead industry reliability at all times. Slide 14 summarizes the progress of our major portfolio. Starting with the upstream, I'm going to provide some more details on Permian and Guyana on the subsequent following pages. In Brazil, our CACRA development is proceeding on schedule. We expect to spud the first exploration well on Urupuru, and that's the block that's adjacent to Kakara, with our partner Petrobras, in the second half of this year. We passed two significant milestones with host government approvals of our development plans for the Papua LNG in Papua New Guinea and Ravuma in Mozambique. In the downstream are three investments at Beaumont, Rotterdam, and Antwerp, These are all upgrading low-value streams to higher-value streams. They're lined out, and all are contributing to earnings and cash. And in the second quarter, we completed the FID of the three remaining major refinery projects that are in our growth plans. In chemicals, the new Baytown cracker and two polyethylene plants are performing well, and the expansion of the high-margin thermoplastic elastomer business at Santoprene started up in May of this year. All these investments are also accretive to current earnings. We started up the third polyethylene plant at Beaumont in July, and that was one month ahead of schedule. We also completed the FIDs of four major new world-scale plants in the first half, three of which were in the second quarter. That's a new polypropylene line at Baton Rouge, a linear alpha olefins plant at Baytown. That'll be a new product to ExxonMobil's chemical portfolio. an expansion to our industry-leading high-margin propylene plasma business at Vistamax, which is also at Baytown, and the largest steam cracker that we have ever built, plus the derivatives at Corpus Christi. On slide 15, you can see that our unconventional Permian and Bakken volumes are growing in line with plan. We increased our Permian volumes by 20% in the second quarter, which is up 90% versus the second quarter last year. We're now at 51 rigs and 12 frac crews in the Permian, and we bought 67 wells to sales in the second quarter. Our unique development plans, which are focused on maximizing long-term value of the resource and leveraging the scale of ExxonMobil to drive capital efficiency, are delivering encouraging results. The rocks and well performance is extremely strong, and as I said previously, Our approach is to understand the impact of development and operating practices on both IP rates and long-term recovery. Drilling a single well and applying a larger completion with higher intensity fracture can yield higher IPs, but it may yield lower ultimate recovery versus drilling several wells with less intense completions. Capital efficiency is critical. and it's an area where our team is constantly looking for ways to improve. It's all about balancing capital outlay, IPs, and the ultimate recovery to achieve the highest value. We've ramped up activity above surface with the ongoing construction of our Cowboy Central Delivery Point facilities in the POCOLATE region of the Delaware, and we finalized the FID to proceed with the greater than one million barrel a day liquids pipeline to the Gulf Coast. The Permian level activity is high, and we're making great progress. Page 16, our first FPSO, Lisa Destiny, is en route to Guyana. The startup is scheduled for the first quarter of next year, but I'm optimistic we'll do better than that. We completed the FID on the second FPSO, Lisa 2, which is close to double the size of Lisa 1 in the second quarter, and that will start up in 2022. The startup of the third FBSO for the Payara and Pakora development remains scheduled for a 2023 startup. We've had three further discoveries in the first half of 2019, Paimara, Tilapia, and Yellowtail. We're continuing to assess the results of these discoveries and are not yet ready to finalize their resource size. However, the Staybrook resource will be six plus billion oil equivalent barrels And again, as I've said before, this resource continues to grow. We anticipate three further exploration wells in the second half. They are likely to include Triple Tail, Uaru, and Macu, with a potential fourth one to spud before year end. We currently have three drill ships in the basin, and the fourth will be on station in the fourth quarter. On the bottom left, we've included a chart to illustrate the continuing increase in our inventory of future exploration prospects. I've included page 17 to remind you of our upstream divestment plans through 2021. We've previously communicated that we anticipate asset sales of $15 billion. As I said before, the $15 billion is a risk number and anticipates that some of the divestment candidates that we put in the market will not realize our retention value. But the marketing program is on track and includes the assets listed on the right. We're also in marketing discussions on other assets that are not public. So I have not, of course, listed them here. Again, this program is on schedule, and we anticipate delivering the $15 billion previously communicated. Finally, on slide 18, a quick update on the significant growth milestones in our integrated ethylene and polyethylene business. on the Gulf Coast. The Baytown and Montbellevue investments have been online for some time, and as I said earlier, are accretive to earnings even at the current low margins. The polyethylene units at Montbellevue started up in 2017 and are operating at capacity. The ethylene steam cracker at Baytown, which started up last year, is operating at 10% above design capacity. The third polyethylene line at Beaumont started up in July ahead of schedule. This was the first line in the world to start up on the higher value but notoriously difficult to produce in a gas phase reactor, metallosine polyethylene, and that was from the first day of operations. We're very pleased that our startup was flawless. In the second quarter, we completed the FID of the largest steam cracker we will have ever built, plus the derivatives, and they're going to be located at Corpus with our partner, Sabic. This will be highly advantaged versus the industry Gulf Coast investments, based on location and, of course, the adjacency to the Permian, lower capital cost, and higher value products. Startup is scheduled for 2022. The fundamentals supporting these chemical investments remain strong. All of this is being done to what we know will be increasing global demand, supported by population growth and a growing middle class. In summary, our organization is absolutely focused on delivering the operating performance we expect today and on delivering our growth plans. We have a high level of confidence that we will deliver, and our performance through the first half of this year demonstrates that we're on track. With that, Neil, I'll hand back to you for the Q&A.