Exxon Mobil Corporation

Good day, everyone. Welcome to this ExxonMobil Corporation third 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 third quarter earnings call. We appreciate your participation and continued interest in ExxonMobil. Neil Hansen, Vice President of Investor Relations. During today's call, I'll review our financial and operating performance and provide updates on the substantial progress we've made on our major growth projects. I'll be happy to take your questions following my prepared remarks. My 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, let me begin by summarizing the excellent progress we've made this year on plans to grow shareholder value. The long-term fundamentals that underpin our investments remain strong. We've generated nearly $9 billion in earnings through the first nine months of the year with a portfolio that is resilient to a range of commodity prices and margins. We are investing in advantage projects that will grow the earnings and cash generation capacity of each of our businesses. The nearly $23 billion of CAPEX year-to-date is in line with current year plans and reflects strong execution of key deliverables. Liquids production has increased significantly from last year, with volumes up 131,000 barrels per day, or 6%. driven by strong growth in the Permian. We remain on track to meet the full-year outlook of producing 4 million oil equivalent barrels per day this year. In addition, efforts to high-grade our portfolio are proceeding ahead of schedule. Including the consideration from the agreement we signed to sell non-operated upstream assets in Norway, divestments now total nearly $5 billion. Exploration success has continued this year with five significant deepwater discoveries, four in Guyana and one in Cyprus. And we've reached final investment decisions for 10 major strategic projects this year, including projects from all three business lines. We also increased the quarterly dividend by 6%, marking the 37th consecutive year of dividend growth. Finally, the strength of our balance sheet provides us with the capacity to invest through the cycle with leverage at just 12%. The positive momentum we've generated so far this year is in line with the plans we laid out in 2018 and reiterated in March, and positions us well to generate long-term shareholder value. I'll now highlight third quarter financial performance starting on slide four. Earnings were $3.2 billion in the quarter, or 75 cents per share, including a positive 7 cent per share impact from a one-time tax item. Results were consistent with expectations, given the margin environment, seasonal impacts, and planned maintenance experienced during the quarter. Fruit oil prices declined relative to the second quarter, while refining margins improved. The broader margin environment remained challenging as short-term supply and demand imbalances continued to pressure natural gas prices and industry chemical and lube base stock margins. Cash flow from operations and asset sales was $9.5 billion in the quarter. After adjusting for changes in working capital, cash flow was $8 billion. CapEx for the quarter was $7.7 billion. PP&E ads and net investments and advances, which is a proxy for cash CapEx, was $6.6 billion. And that ratio is consistent with our rule of thumb that cash CapEx is generally 85% of total reported CapEx. Free cash flow in the quarter. increased to $2.9 billion, reflecting higher cash generation and moderately lower investments in the quarter. I'll now go through a more detailed view of developments since the second quarter on the next slide. In the upstream, both liquids and gas realizations were lower in the third quarter, consistent with a decrease in liquids markers and continued gas supply length. Production was in line with expectations, with continued growth in the Permian. Eliza Destiny FPSO is currently being commissioned in Guyana, and we announced the fourth discovery of this year with the Triple Tail Exploration Well. We also made considerable progress on our $15 billion divestment program, reaching an agreement to sell our Norway non-operated assets. In the downstream, refining fuels margins improved during the quarter with supply tightness and stronger distillate demand in Asia and Europe. On the other hand, North American logistics differentials narrowed, primarily driven by the addition of Permian pipeline capacity. Lower schedule maintenance, most notably the completion of turnaround activities at our Joliet refinery, and improved reliability relative to the second quarter contributed to stronger downstream financial performance. Although long-term fundamentals remain strong in the chemical business, polyethylene and aromatics margins continue to be impacted by supply length from industry capacity additions. The recent startup of the polyethylene expansion at Beaumont is performing well and running above planned rates. efforts to grow sales of high-performance metallocene products that deliver sustainability benefits, including lighter packaging weight, lower energy consumption, and reduced emissions. Lower scheduled maintenance across U.S. Gulf Coast sites contributed to improved chemical earnings, although this was partly offset by a reliability event at Baytown. We also progressed research and development of lower emissions technologies. We entered into an agreement with Mosaic Materials to explore breakthrough carbon capture technology using metal organic frameworks to separate carbon dioxide from the air. The agreement expands our carbon capture technology research portfolio and will enable evaluation of opportunities for industrial uses at scale. We also signed an agreement with the Indian Institute of Technology. This partnership will focus on progressing research in biofuels and bioproducts, gas transport and conversion, and other low-emissions technologies for the power and industrial sectors. This expands our portfolio of research collaborations, which now stands at more than 80 universities, five energy centers, and multiple private sector partnerships. Let's move now to slide six for an overview of third quarter earnings relative to the second quarter of this year. Third quarter earnings of $3.2 billion were up $40 million from the second quarter. Upstream earnings declined by approximately $1.1 billion, driven by lower liquids realizations and the absence of a favorable tax item. Downstream earnings increased by nearly $800 million with lower scheduled maintenance and stronger industry margins. Improvements in downstream earnings were partly offset by the decline in North American differentials. Chemical earnings increased by $50 million with lower scheduled maintenance, partly offset by the reliability event at Baytown. Finally, Corp and Fin earnings increased by $300 million due to the previously mentioned favorable tax item. I'll review changes in upstream volumes on slide seven. Production in the third quarter was 3.9 million oil equivalent barrels per day, an increase of 113,000 oil equivalent barrels per day relative to the third quarter of last year, representing a 3% increase. The higher volumes were driven by growth of 123,000 oil equivalent barrels per day in the Permian, representing a 72% increase from the prior year quarter. The third quarter cash profile is shown on slide eight. Third quarter earnings, when adjusted for depreciation expense and changes in working capital, yielded $9.1 billion in cash flow from operating activities. There was a $1.6 billion release of working capital in the quarter, driven primarily by inventory effects related to maintenance activities. Other items included the favorable one-time non-cash tax item. Our divestment program is progressing well and ahead of schedule. Third quarter proceeds from asset sales includes a deposit for the $4.5 billion Norway asset sale and the cash received for the sale of our mobile bay asset. Third quarter additions to PP&E and net investments and advances were $6.6 billion. Gross debt increased by approximately $2 billion and cash ended the quarter at $5.4 billion. I'll now provide an update on the excellent progress we are making on key investments across all of our businesses. A summary is provided on slide 9. Starting with the upstream, growth plans in the Permian and Guyana remain on track, and I'll provide some additional details on these projects in the coming slides. In Brazil, we expect the Petrobras-operated Wirapuru well to commence drilling in the fourth quarter. In the downstream, three new projects are online and performing well. supporting increased production of cleaner, higher value products. We've made final investment decisions this year for four additional projects, including the Beaumont light crude expansion and the Wink to Webster pipeline, both of which will support our integrated Permian strategy and growth plans. In our chemical business, with the recent startup of the Beaumont polyethylene expansion, we now have eight new facilities online with four additional projects receiving final investment decisions this year. Moving to slide 10, I'll provide an update on our unconventional business. Permian growth remains on track, with production averaging 293,000 oil equivalent barrels per day in the third quarter. Although we are in the early stages in the development of this significant resource, results are encouraging, including continued strong well performance. Construction of processing and takeaway capacity also continues. An important milestone this quarter was the completion of the Phase I of the Delaware Central Delivery Point and the pipeline to the Wink Terminal. I'll provide an update on Guyana on slide 11. Commissioning of the LISA Phase I FPSO is underway and on schedule. The target for achieving first oil is December, dependent on favorable weather conditions. This would place startup within five years of initial discovery, well ahead of the typical pace for the industry of closer to nine years. LIZA Phase 2 engineering and construction is progressing well, following FID earlier this year. And we're also working with the government to receive necessary project approvals for Piara with a planned startup in 2023. The triple tail discovery, which we announced in September, marked the fourth exploration success of 2019. The well encountered 108 feet of high quality oil bearing sandstone. And we are also pleased to highlight that with deeper drilling on the well, additional hydrocarbon reservoirs were encountered, providing potential upside to the initial discovery. We continue to progress considerable undrilled potential in Guyana with a fourth drilling ship, which will commence exploration activity in the fourth quarter. Three upcoming wells, Huaru, Mako, and Haasa, are planned to spud in the upcoming months. Locations of those wells are highlighted here on the map. I'll now provide some perspectives on the upcoming IMO 2020 implementation on slide 13. The chart on the left highlights the coking capacity advantage we have relative to our integrated peer group, a position we recently strengthened with the startup of the Antwerp Coker. This new facility upgrades bunker fuel oil currently produced in our northern European refineries to higher value products, including ultra-low sulfur diesel. The middle chart shows the clean-dirty spread using Asia gas oil and high sulfur fuel oil. As you can see, the spread is expanding with the forward curve and third-party estimate ranges showing further widening, which will favor more complex refiners with the capacity to upgrade heavier sour crudes to cleaner products. And just to give you some additional perspective, a general rule of thumb for our portfolio is that for every dollar per barrel change in the clean dirty spread, downstream annual earnings will increase by approximately $150 million. And a large portion of the benefit comes from the associated widening of the light sweet and heavy sour crude spreads and our ability to leverage coking capacity to run higher quantities of discounted crudes. Now, turning to slide 14, I'll provide additional details on our portfolio management activities. We've made considerable progress on our 2021 divestment objective of $15 billion, reaching an agreement to sell our non-operated Norway assets for $4.5 billion. The sale includes ownership in more than 20 fields and is expected to close in the fourth quarter. pending regulatory approvals. The sales price of $4.5 billion is subject to interim period adjustments with an effective date of January 1, 2019. Estimated total cash flow from the divestment is approximately $3.5 billion after closing adjustments, with expected 2019 cash proceeds of $2.6 billion, and we will receive another $0.9 billion of non-contingent consideration, and tax refunds over the next few years. We are also progressing marketing activities involving but not limited to assets in the Gulf of Mexico, Azerbaijan, and Malaysia. I'll now provide some perspective on our outlook for the fourth quarter, starting on slide 15. In the upstream, we expect production to increase in the fourth quarter. largely driven by seasonal gas demand, and I'll provide some additional detail on the seasonality of gas demand on a following chart. With regards to the Norway divestment, again, assuming regulatory approvals are received, we anticipate the sale will close in December and that we will recognize an earnings gain of approximately $3.5 billion. Potential further expansion of clean, dirty, and sweet-sour spreads as preparations for the IMO spec change continue. Higher scheduled maintenance in the fourth quarter relative to the third quarter is also expected to impact results. Chemical margins will likely remain under pressure in the fourth quarter as the market continues to work through supply length from recent industry capacity additions. Scheduled maintenance in the chemical business in the fourth quarter should be generally in line with third quarter levels. And we expect continued recovery from the third quarter reliability event at Baytown. I'll provide some additional details on scheduled maintenance on a subsequent slide. The chart on slide 16 shows the increase in volumes on oil equivalent basis. that we typically experience from higher gas demand in Europe in the fourth quarter. As you know, gas demand is highly seasonal and driven by weather conditions. Fourth quarter gas demand has been, on average, 150,000 oil equivalent barrels per day higher than the third quarter. We expect a similar trend to occur this year. Turning to slide 17, I'll provide some perspectives on our fourth quarter outlook for downstream and chemical scheduled maintenance. As previously mentioned, scheduled maintenance in the downstream this year is higher than normal, again, in part due to preparation for IMO 2020. Plan maintenance tends to be seasonal, in line with demand patterns. We expect the impact from scheduled maintenance in the fourth quarter to be higher relative to what we experienced in the third quarter. The estimated earnings impacts for the fourth quarter and first quarter 2020 for the downstream are shown on the upper left chart. In the chemical business, shown on the bottom left chart, we expect schedule maintenance levels to be generally in line with the third quarter and significantly below the peak we saw in the second quarter of this year. I'll conclude my prepared remarks with a few key messages on slide 18. In the upstream, we are delivering on plans to grow liquids production and high-grade the portfolio. Recent project startups in downstream and chemical continue to perform well, and we reached final investment decisions for eight key projects so far this year. We are also leveraging our significant financial capacity to progress advantaged investments through the cycle, maintaining constancy of purpose. on our commitment to grow long-term shareholder value across a range of market environments. Finally, but importantly, we are building on our extensive network of partnerships to develop new technologies to address the dual challenge of providing reliable and affordable energy while mitigating impacts to the environment, including the risks of climate change. And I'll be more than happy to take any questions you might have.

Thank you, Mr. Hansen. The questions and answer session will be conducted electronically. If you'd like to ask a question, please do so by pressing the star key followed by the digit 1 on your touchtone telephone. We request that you limit your questions to one initial with one follow-up so that we may take as many questions as possible. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Additionally, please lift your handset before asking your question. We'll proceed in the order that you signal us, and we'll take as many questions as time permits. Once again, that's star 1 on your touchtone telephone to ask a question. First question will come from the line of Doug Terrison with Evercore ISI.