Exxon Mobil Corporation

Good day, everyone, and welcome to this ExxonMobil Corporation fourth quarter 2019 earnings call. Today's call is being recorded, and 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 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. After I cover the quarterly and full-year financial and operating results, Darren will provide his perspectives reflecting on 2019 and the year ahead. Following Darren's remarks, I'll be glad to address specifics on the reported results, while Darren will be available to take your questions on broader themes, including strategic priorities, progress on major growth projects, and views on market fundamentals. Our comments this morning will reference the slides available on the investor section of our website. I would also like to draw your attention to the cautionary statement on slide two and the supplemental information at the end of this presentation. I'll now highlight fourth quarter financial performance starting on slide three. Earnings were $5.7 billion in the quarter, or $1.33 per share, including a positive $0.92 per share impact from the Norway divestment and a one-time tax item. Results were in line with expectations, taking into account the challenging price and margin environment we had previously communicated. Liquids realizations were essentially flat, while refining and chemical margins weakened significantly in the quarter. The broader margin environment remained challenging as short-term supply and demand imbalances continued to pressure natural gas prices and lube-based stock margins, despite modest improvement in the fourth quarter. Cash flow from operations and asset sales was $9.4 billion in the quarter. After adjusting for changes in working capital, cash flow from operations and asset sales was $11.1 billion. CapEx for the quarter was $8.5 billion and $31.1 billion for the full year, slightly ahead of the previous projection of $30 billion. with better than expected pace on the Beaumont light crude expansion and Baton Rouge polypropylene projects, and of course, the early startup of Liza Phase 1 in Guyana. Full year PP&E ads and net investments and advances, a proxy for Cash CapEx, was $26.8 billion. I'll now provide a more detailed view of developments since the third quarter on the next slide. In the upstream, liquids realizations were essentially flat, while gas realizations improved slightly. Production was in line with expectations, with higher seasonal gas demand in Europe. Liza Phase I achieved first oil ahead of schedule at just under five years from discovery, which is significantly ahead of the industry average of nine years. We also announced the 15th and 16th exploration discoveries with the Mako and Walru Wells offshore Guyana. We closed the sale of our Norway non-operated assets during the quarter, highlighting good progress to date on our $15 billion divestment program. In the downstream, refining fuels margins decreased during the quarter, consistent with seasonal demand. In addition, weaker high sulfur fuel oil pricing did not fully reflect in crude spreads. As a result, low and medium conversion refinery margins weakened more than high conversion refinery margins. This had a notable impact on our downstream results outside of the United States. And this demonstrates the importance of strategic investments like the recently sanctioned Rezid upgrade project at our refinery in Singapore, which will greatly improve conversion complexity. Reliability in the downstream improved in the quarter, largely offsetting higher scheduled maintenance. Although long-term fundamentals remain strong in the chemical business, polyethylene margins continue to be impacted by supply length from industry capacity additions. And in the fourth quarter, higher NAPFA feed costs. With approximately 25% of our polyethylene portfolio produced from liquid feeds like NAPFA, this had a significant impact on our chemical business line results. On the project side, the recently completed Beaumont polyethylene expansion is running well. and producing at 5% above design rates. As part of our collaborative efforts to develop and deploy lower emissions technologies, we signed a two-year expanded joint development agreement with Fuel Cell Energy to optimize carbonate fuel cell technology for large-scale carbon capture. And we extended our support of the MIT Energy Initiative's low-carbon research and education mission by renewing as a founding member for another five years. Let's move now to slide five for an overview of fourth quarter earnings relative to the third quarter. Fourth quarter earnings of $5.7 billion were up $2.5 billion from the third quarter. Upstream earnings increased by approximately $4 billion, driven by the gain on the Norway divestment, a favorable one-time tax item, higher volumes, and improved gas realizations. Downstream earnings decreased by $330 million due to lower margins and higher scheduled maintenance, partly offset by improved reliability and favorable year-end inventory impacts. Also included in the downstream results was a sequential $450 million negative mark-to-market impact on derivative positions, essentially offsetting the inventory effect. Chemical earnings decreased by $600 million, driven by weaker margins and higher expenses supporting growth projects. Finally, Corp and Fin earnings decreased by approximately $500 million due to the absence of a favorable one-time tax item in the third quarter. Moving to slide six, full-year earnings of $14.3 billion were down $6.5 billion from 2018. Upstream earnings increased by $360 million, driven by the Norway divestment and higher liquids volumes. It was partly offset by lower realizations and expenses supporting growth. Downstream earnings decreased by $3.7 billion due to more narrow North American differentials, lower refining margins, higher scheduled maintenance, and the absence of the Germany retail and Augusta divestments in 2018. And again here, included in the year-over-year results was a negative $420 million mark-to-market impact on derivative positions, offsetting any benefits from inventory effects. Chemical earnings decreased by $2.8 billion, driven by weaker margins, higher expenses supporting growth, and the absence of a one-time tax item. I'll now provide more insight into the challenging 2019 price and margin environment on slide seven. As shown here in the top left chart, cyclically low prices and margins across our business lines accounted for a year-over-year earnings decrease of $7.5 billion. All other earnings drivers netted out to a positive impact of $1 billion. The chart at the bottom 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 2019 and 2018. Now, as we note here, the fourth quarter saw further deterioration in prices and margins, especially chemical margins, with the increase in liquid feed costs. While margins weakened from 2018 and remain on the low end of the 10-year range across many of our business lines, It's important to note these levels are generally consistent with the scenarios we use to test our investment decisions. Despite the challenging market environment, long-term demand fundamentals remain strong. In fact, growth in demand in 2019 for upstream liquids and natural gas, distillate products, and polyethylene was at the higher end of the compound annual growth rates experienced over the past 10 years. While making investment decisions based on long-term fundamentals is challenging when near-term prices and margins are under pressure, it provides us with the opportunity to leverage our competitive advantages, including significant financial capacity. It allows us to benefit from the favorable environment that occurs when others pull back and the cost of investing declines. I'll now spend some time looking at the full-year performance of each of our businesses in more detail, starting with the upstream. Volumes grew by 119,000 oil equivalent barrels per day, with liquids growth of 5%, driven by Permian, Ebron, and Kaombo. Efforts to high-grade our portfolio also resulted in gains on asset sales, primarily from the Norway divestment. And as indicated previously, liquids and gas realizations also impacted earnings, with declines of 8% and 17%, respectively. In the downstream, More narrow North American crude differentials and lower margins reduced earnings by $3 billion. The change in differentials shown on the upper left chart accounted for $1.7 billion of that year-over-year decrease. Full-year industry margins were 19% lower than 2018, pressured by new industry capacity additions that exceeded demand growth by 800,000 barrels a day. And you can see that on the bottom left chart. Regarding IMO, we continue to see clean, dirty product spread expand in the fourth quarter. However, light, sweet, and heavy sour crude differentials have been slow to respond with lower global supply of sour crudes, strong global refining runs coming out of fall maintenance, and the previously mentioned industry capacity additions. The chart on the upper left of this page shows medium, heavy sour crude discounts relative to Brent through 2019. While the spread has expanded recently, crude discounts are not at parity with high sulfur fuel oil prices. The marine fuel supply chain fundamentals are still transitioning. Speed and product pricing have not reached equilibrium, placing pressure on low to medium conversion margins. Now, we would expect this to result in fewer heavy sour crude runs, ultimately leading to higher discounts and market parity. As we highlighted several times over the past year, scheduled maintenance in the downstream was higher than normal, in part due to preparation for IMO. In fact, 2019 represented the highest level of scheduled maintenance for the downstream in the past 15 years. This activity level decreased earnings by $700 million relative to 2018. As shown on the bottom left chart, we expect 2020 scheduled maintenance to be more typical, in line with our historical average. Moving to slide 11, I'll provide more perspective on the chemical margin environment and its impact on earnings. Our chemical portfolio is positioned well to take advantage of low-cost feed and energy costs, with over half of our polyethylene capacity in North America. This is balanced with our production footprint in Asia Pacific, which positions us near key growth markets. However, the current margin environment remains challenged with excess industry capacity. despite demand growth of 4% per year since 2016. Now, relative to 2018, lower margins reduced chemical margins by $1.8 billion. In the fourth quarter, polyethylene margins were further impacted by tighter feed supply, resulting in a 65% increase in the cost to produce ethylene from NAPFA. Key industry price spreads, shown on the bottom left of the chart, declined by 40% on average for the year. Given our product mix, this is important, since these changes impacted approximately 60% of our production. Now, the significance of these market factors will obviously vary across the industry, depending on product mix. Growth-related expenses, unfavorable foreign exchange, and the absence of a one-time tax item also decreased chemical earnings by approximately 700 million dollars. I'll now provide a more detailed overview of the fourth quarter cash profile shown on slide 12. Fourth quarter earnings, when adjusted for depreciation expense and changes in working capital, yielded $6.4 billion in cash flow from operating activities. The $4.3 billion impact from working capital and other related to non-cash adjustments for the gain on the Norway divestment. Fourth quarter proceeds from asset sales of $3.1 billion, primarily reflects the cash received for the Norway asset sale. Fourth quarter additions to PP&E and net investments and advances were $7.4 billion. Gross debt was largely unchanged, and cash ended the quarter at $3.1 billion. And with that, I'll turn the call over to Darren.

Thank you, Neil. Good morning, everyone. It's great to be on the call with you today. Let me start by sharing my perspective on last year, beginning with margins. There's no doubt that 2019 was a challenging year for a number of our businesses. I think Neil's chart made that point. Near or at 10-year lows on price and margins for gas, refining, and chemicals. Fourth quarter was particularly challenging for our chemical business. Of course, it's important to understand what's driving this and the implications for our businesses. in our investment plans. As Neil said, and I'll show you later, the product demand to underpin our investments in each of these sectors remains solid. Depressed margins are driven by excess capacity, which will be a short-term impact, particularly if industry pulls investments back significantly, which, by the way, we're beginning to see. We know demand will continue to grow, driven by a rising population, economic growth, and higher standards of living. We know that excess capacity will shrink, typically faster than people think, and margins will rise. Then, new capacity will be needed. These are the classic price cycles of capital-intensive commodity industries. We believe strongly that investing in the trough of this cycle has some real advantages. As industries pull back, projects' costs come down, resulting in lower-cost capacity additions. They're then available to catch the cycle upswing. This is a win-win, capturing high margins at a low and lower cost. The downside, of course, is the draw in cash, which we're seeing and responding to. Our organization is very focused on driving further efficiencies and looking for opportunities to optimize and or pace our investment portfolio while preserving value and reducing the draw. Our new projects organization and upstream business lines are giving us a good line of sight on the best options to grow value efficiently. As I've said before, we have an important advantage because of our large opportunity set. It gives us optionality in these volatile markets. We also have a very healthy balance sheet, which was built for times like this, giving us a significant advantage in maximizing medium to long-term value. So while we would prefer higher prices and margins, we don't want to waste the opportunity that this low price environment provides, which leads me to our 2019 performance. Our portfolio of integrated businesses helped us in facing the short-term headwinds, generating $14 billion in earnings. If you normalize our 2019 results for the industry's price and margin environment and look at them on the same basis we used last March at our investor day, Earnings were in line with the potential we communicated. Obviously, this is a theoretical exercise, but a very important one. We can't control the short-term price environment. Stripping out the market impacts allows us to judge the underlying progress we're making in building a stronger business based on the longer-term fundamentals. This is absolutely essential for a long-cycle capital-intensive business. In the meantime, the lower price environment puts additional focus on driving efficiencies in both capital outlays and operating costs. It also drives us to ensure the schedule and mix of our capital expenditures are optimized. This is something our organization is very focused on. In 2019, we made good progress in upgrading and focusing our asset portfolio with the divestment of our upstream Norway OBO business. We're on tracks with the plans that we outlined last March with a number of additional assets in the market. However, I want to emphasize that this is a value play. We are high grading our portfolio. As higher quality opportunities come into our portfolio, we evaluate other assets for long-term strategic fit. To move an asset out, we have to find a buyer who can realize more value than we can. Otherwise, there's no space for a deal. and we won't transact. We remain very excited by our investment opportunities. Even in the price environment we saw last year, our investments would perform. It reinforces our capital investment strategy, which is invest in the long-term fundamentals, but test against short-term lows. We made good progress on our projects in 2019 and used our financial capacity to mitigate the price environment. resulting in a year-end leverage of 13%, a level we feel very comfortable with. We increased production by 119,000 oil equivalent barrels per day, a 3% increase over 2018. Nearly all of this is attributable to the success we had in growing liquids, which increased by 120,000 barrels per day, or 5% relative to 2018. continue to ramp up in the Permian Basin was a significant driver of this growth. We continue to like what we're seeing in our Permian development. The organization is making very good progress on maximizing resource recovery, efficiently deploying capital, and optimizing production. In addition, we're making good progress on our logistics, refinery, and chemical investments that leverage Permian production, giving us greater value through an integrated approach where the whole exceeds the sum of the parts. We had another good year exploring with six major deepwater discoveries, five in Guyana and one in Cyprus. The Guyana discoveries resulted in a 2 billion barrel increase in estimated recoverable resources, which now exceeds 8 billion oil equivalent barrels. In fact, we had four of the top 10 discoveries in the world and five out of the six largest oil discoveries. In recognition of this success, for the second year running, ExxonMobil was named Explorer of the Year. We also made progress in our work to develop new, lower emissions technologies to help address the risk of climate change. While renewables like wind and solar play an important role, they don't solve the emissions challenge for every market, geography, or application. Society needs new technologies that will reduce emissions while meeting the growing demand for affordable and reliable energy. We're leveraging our research organization to help develop them. In 2019, we signed or extended eight agreements with a variety of companies and institutions to expand research into lower emissions technologies. This adds to the more than 80 collaborations we have in place across academia, national labs and energy centers to scale up advanced biofuels, carbon capture technology, and less energy-intensive manufacturing processes. These efforts address sectors that account for 80% of emissions, commercial transportation, power generation, and industrial. In summary, looking at the year in total, I'm pleased with the progress we've made, particularly in light of the challenging market conditions. Almost two years ago, we outlined a plan to grow the value of our corporation, robust to the price cycles inherent in our industry. Two years down the road, we're delivering on those plans, doing what we said we would. With the increased supply and corresponding drop in margins, we've increased our focus on efficiencies while we continue to optimize our investment portfolio. Again, taking advantage of the optionality that comes with a large number of opportunities. which I'd like to turn to next. In the upstream, I've already mentioned our success in Guyana, which I'll come back to in a few moments. Development of our deep water portfolio in Brazil, another key asset, remains on track, with exploration activities planned over the next couple of years to better quantify this high potential resource. We're also making good progress in the Permian, which I'll talk more about when we get to a slide later in the deck. In the downstream, Three of our major projects are online and contributing to earnings and cash flow, even in last year's challenging market. These projects position us well for the growth and demand of higher-value distillates and lubricant-based stocks. The remaining projects in our downstream portfolio progress consistent with our plans. These projects have all been tested against the margin environment we saw in 2019, and all would be earnings and cash recreative. In our chemical business, Eight of our 13 growth facilities are online, and we reached final investment decisions on another four last year, which again remain attractive even when tested against the 2019 market environment. Across the board, we remain extremely confident in the value of our project portfolio. Each project leverages our competitive advantages and is underpinned by growing demand, which is shown on the next chart. Demand fundamentals remain strong, supported by a growing population, economic expansion, and higher standards of living. You can see these fundamentals reflected in the historic growth in demand for the energy and products that we provide, including demand growth in 2019. Of course, growing demand is only part of the equation. In our business, large capacity additions can come online and overwhelm the growth in demand in the short term. which pushes margins down. That's the story of 2019, and it's built into the planning basis for our projects. Our investment strategy builds on long-term fundamentals, leverages our competitive advantages, and delivers projects robust to down cycles. This will structurally improve ExxonMobil's capacity to generate earnings and cash flow, which we laid out at last year's Investor Day. This approach has resulted in our most attractive investment portfolio since the merger, 20 years ago. It has also generated a portfolio with an average return of 20%. We've seen no market developments over the course of 2019 that have changed this. However, we are using the 2019 price environment to challenge ourselves to further optimize the portfolio and drive greater efficiencies. While we expect to benefit from this effort, it hasn't led us to change our 2020 CapEx guidance. Our projects remain advantaged and the economics are robust industry price cycles. Let me use our most recent startups to demonstrate this, starting in the downstream and chemical. Leveraging the capabilities of our organization, our scale, and our technology are essential in developing industry-leading projects, but the benefits are only realized if executed efficiently. Another X on mobile strength. You may recall that we shared a version of the chart on the left during our investor day. The gray area represents our estimate of the net cash margin for every refinery in the world at 2019 prices. The blue line represents our Rotterdam refinery prior to our recent investment. The second line represents the yield improvement we executed with the first ever deployment of the process and catalyst that we developed. This final line is what we actually realized after a year of runtime, no different than what we planned. Now, this would be expected for an industry standard proven technology. However, it's a significant accomplishment for a new-to-the-world technology, one that significantly improved Rotterdam's earnings last year. This next line shows the Antwerp margin before our Coker investment. Next, we show the expected margin improvement assumed in the project basis. Finally, the actual margin improvement. As you can see, the project is performing better than expected in a very low margin environment. The Beaumont polyethylene expansion started up ahead of schedule and is exceeding design rates by 5%, while the new Baytown, Steam Cracker, and polyethylene lines are operating 10% above design rates. Combined, These projects contributed over $600 million in 2019's very low margin environment. When markets recover, their contributions will be even more significant. Bottom line of this chart, we've delivered these investments in line with our commitments. They are meeting or exceeding expectations, and they are adding value in extremely challenging market conditions. Let me turn to the upstream and Guyana. Reaching first oil in Guyana was a major achievement for all stakeholders. It is the culmination of years of hard work and dedication by the people of Guyana and our project team. First oil was achieved ahead of schedule, about five years faster than the average timeline for the industry, and at an industry-leading development cost. Visa Phase 1 will continue to ramp up production to 120,000 barrels a day over the next couple of months. while Aliza Phase 2 is progressing well with the startup in early 2022, in line with our commitments and at the leading edge of industry. The chart on the left provides a perspective on industry cost and schedule. We're continuing to work with the government toward FID at Phase 3, PAYARA, for this targeted startup in 2023. Looking more broadly, as I've already mentioned, we've increased the estimated recoverable resource from the Staybrook block to more than 8 billion barrels, an increase of 2 billion oil equivalent barrels. We've now had 16 successful wells out of 18 drilled, including our recently announced discoveries at Mako and Wauru. Resource size across these 16 successful wells equates to an average of more than 500 million barrels per discovery, or the equivalent of a giant for each discovery. We recently brought in a fourth drill ship to the basin and are making plans for a fifth. Significant potential remains beyond these first few phases as we move to test Kytor and Conje blocks to the north and east of State Road. Increasing the scope of our exploration activity and development and appraisal drilling when costs are low relative to recent years enables us to increase the value of this substantial resource. This is good news for the country and for the investors. Let me turn now to another major growth play, our integrated Permian development, which made significant progress in 2019, again, in line with our commitments. Let me start by saying that we are still in the relatively early days of this development, particularly in the Delaware Basin. For perspective, we've developed roughly 20% of our resource in the Midland and only around 3% of our resource in the Delaware. We're continuing to learn as we delineate and develop this resource. Having said this, we are making very good progress. Production for the year increased by 120,000 oil equivalent barrels per day, or nearly 80% relative to 2018. As we've said previously, our development program is driven by balancing production rates, resource recovery, and capital efficiency to maximize value. We are seeing continued improvements in drilling and completions, significantly improving cost, while our Delaware well performance is at the leading edge of industry. We are continuously optimizing our cube development drilling, and our subsurface technology is enabling us to tailor well spacing, which is resulting in higher production, improved recovery, and capital efficiencies. Last year, we made considerable investments in above-ground compression, separation, and logistics infrastructure. This not only supports the current drilling program, but is building cost-efficient infrastructure for future drilling. This follows the comprehensive development plan that we laid out last March and captures the capital efficiency of scale development. I know that Neil Chapman and his team are excited by the potential and are looking forward to discussing the magnitude of the improvements we are seeing at our upcoming Investor Day. I do want to touch briefly on our expectations for 2020, though again, we'll have more detail in March. As I mentioned before, the Guyana Phase 1 ramp-up and Phase 2 construction will continue, and we will broaden our exploration efforts as we work through the considerable undrilled potential in the basin with five additional wells planned. We expect to make considerable progress in the Permian with completion of the Cowboy Central Delivery Point, execution of the first large-scale cube development, and volumes growth of 200,000 oil equivalent barrels per day by year end. We're anticipating FID for the next wave of our major growth projects, including Guyana Phase III and Brazil. We're also planning for significant exploration activity over the next two years in Brazil to begin to test the tremendous potential of our acreage position. In the downstream, our recent project startups will capitalize on the margin uplift associated with higher value products, And coming off a year of significant scheduled maintenance, we expect higher refinery utilization in 2020. In the chemical business, we will continue to grow sales of performance products. And even with the near-term margin pressures, we expect our recent project startups will continue to deliver earnings and generate positive cash. Across the corporation, we'll maintain a sharp focus on improving our base businesses, driving efficiencies, and optimizing the value of our investment portfolio. We'll continue to actively market less strategic assets in an effort to high-grade our portfolio through value of creative investments. And of course, we'll continue to leverage a key competitive advantage, our financial capacity, capture industry-leading value across the price cycles. Given the attractiveness of our organic investment opportunities, this was an important advantage last year. As you can see in this chart, as the margins in the downstream and chemical business dropped to historic lows, we utilized our financial capacity to fund projects that improved our competitiveness and positioned us to capture the eventual upswing. With this, our leverage increased slightly during the year, but remains well below our peer group in the broader energy sector. To give you a sense of our scale advantage, 1% of incremental leverage equates to about $4 billion in additional debt. While our financial capacity is an important advantage, it is one we use very thoughtfully. Given the volatility of our industry and the opportunities that come with it, we strive to maintain a significant buffer to preserve optionality. Now, before I hand it back to Neil, I'll offer a few closing thoughts. As we've demonstrated over the past two years, we are committed to delivering on our investment plans and high-grading our asset portfolio to strengthen the earnings and cash generation of our business. across a broad range of price environments. We have a very rich set of investment opportunities, and as we work to develop these opportunities, we remain focused on optimizing total value over the long term. 2019 price and margin environment, we've increased our efforts to drive further capital efficiency and optimize pace without compromising value. We will remain thoughtful in utilizing our financial capacity, but we'll take full advantage of it to capture value of creative opportunities. without compromising our flexibility. Finally, we'll continue to focus on improving our base business and driving efficiencies across the entire corporation. With that, I'll hand things back to Neil.