Exxon Mobil Corporation

Good day, everyone, and welcome to this ExxonMobil Corporation first quarter 2021 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. Stephen Littleton. Please go ahead, sir.

Thank you, and good morning, everyone. Welcome to our first quarter earnings call. We appreciate your participation and continued interest in ExxonMobil. I am Steven Littleton, Vice President of Investor Relations. I am pleased to welcome Darren Woods, Chairman of the Board and Chief Executive Officer of ExxonMobil, who will be joining me for the call today. After I cover the quarterly financial and operating results, Darren will provide his perspectives on the quarterly results and how we are positioned for 2021. Following those remarks, Darren and I will be happy to address any questions. 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 to the supplemental information at the end of this presentation. I'll now highlight developments since the fourth quarter of 2020 on the next slide. Across all three businesses, improved results reflect encouraging signs of the recovery from the pandemic as vaccinations are administered and some restrictions are lifted. In the upstream, liquids and gas realizations improved significantly versus the fourth quarter. Production was higher driven by lower government mandated curtailments and higher seasonal gas demand in Europe. And as part of ongoing efforts to high grade our portfolio, we announced the sale of most of our non-operated assets in the United Kingdom Central and Northern North Sea. The sale price of more than $1 billion is subject to closing adjustments and has potential upside of approximately $300 million in contingent payments based on commodity prices. In the downstream, we continue to realize improvements in the North America refining margins However, in Europe, margins remained impacted by COVID lockdowns. While we have seen improved demand for gasoline and diesel, jet demand remains impacted by global travel restrictions. During the winter storm, our Texas foot refiners were able to provide power to more than 200,000 homes through our cogeneration facilities. During the quarter, we announced the intent to convert both the Altona Australia Refinery and the Slagen Refinery in Norway to fuel import terminals as overall industry rationalization continues. In the quarter, there were approximately 500,000 barrels of industry rationalizations announced. In chemical, tight industry supply, shipping constraints, and strong demand resulted in global average margins improving to the top of the historic 10-year range. We were able to capture the benefits of these improved margins with strong reliability and the rapid recovery of our operations from the winter storm. In addition, we have continued to deliver further cost efficiencies. Across the corporation, improved prices and margins, in addition to cost reduction initiatives, resulted in increased cash flow from operations, enabling debt reduction of more than $4 billion in the quarter. In February, operations across all three businesses were impacted by winter storm Uri. Repairs were completed and operations fully recovered by the end of the quarter. Finally, we established a low carbon solutions business to commercialize and deploy our portfolio of emission reduction technologies. The new business will initially focus on carbon capture and storage. one of the critical technologies required to achieve net zero emissions and the climate goals outlined in the Paris Agreement. Let's move to slide four for an overview of first quarter results. The table on the left provides a view of first quarter results relative to the prior quarter. First quarter earnings were $2.7 billion, including $31 million of identified items related to severance. Earnings excluding identified items were $2.8 billion, an increase of $2.7 billion versus the fourth quarter. Despite the impacts of the winter storm, which you will see called out in the table, earnings improved across all businesses primarily due to higher prices and margins. There was a $300 million benefit in the quarter from mark-to-market impacts on open financial derivatives for which the physical trading strategy had not closed. We expect to realize the full earnings impact of these trading strategies when they close in the future. Also, we have continued to benefit from structurally lower operating costs in all of our business lines. On the next slides, I will cover a brief summary of quarterly results. I will focus my comments on the underlying business performance, excluding identified items. Upstream earnings improved by over $1.8 billion in the first quarter, with liquid realizations increasing by 42% and gas realizations by 33%. The earnings change associated with volumes was negatively impacted by mix and timing effects, which offset higher production versus the prior quarter. Lower expenses, including structural efficiencies, contributed approximately $170 million in earnings. On the next slide, I will cover a brief summary of upstream volumes. Upstream volumes increased by an average of approximately 100,000 oil equivalent barrels per day compared to the fourth quarter of 2020. Gas volumes were 12% higher, mainly due to seasonal gas demand and lower schedule maintenance. Liquids were down 3% with winter storm impacts and higher maintenance. Lower entitlements due to higher prices negatively impacted volumes by approximately 40,000 oil equivalent barrels per day. Reduced government mandated curtailments increased volumes by about 60,000 oil equivalent barrels per day, and gas demand was higher by approximately 70,000 oil equivalent barrels per day, mainly due to seasonal gas demand in Europe. Guyana and Permian production were essentially flat versus the fourth quarter of 2020. However, compared to the first quarter of 2020, Permian production was approximately 20% higher, excluding the impacts of the winter storm, an average of around 395,000 all equivalent barrels per day in the quarter. Guyana production increased by approximately 70%, or 19,000 barrels per day over the same period. Moving to slide seven, downstream earnings improved by over $300 million in the first quarter, despite the impacts of the winter storm. During the quarter, margins improved by nearly $500 million as North America product demand continued to rebound. There was almost $400 million of earnings benefit from the expense reductions in the quarter, including structural efficiencies related to maintenance optimization, logistics, and marketing. We also had unfavorable foreign exchange effects in the absence of prior period inventory impacts during the quarter. A reserve for announced terminal conversions is included in the other factor. Moving to Chemical on slide eight. Chemical had a strong quarter, delivering over $1.4 billion in earnings, more than a $700 million improvement versus the fourth quarter. Margins improved by $500 million, driven by tightly supplied polyethylene and polypropylene markets impacted by the winter storm where, at its peak, approximately 75% of U.S. polyethylene capacity was offline. Performance product demand into packaging and durable goods was resilient through the period. During the quarter, we had strong reliability, which positioned us to capture the improved margins. We continue to deliver cost reductions through turnaround and maintenance scope optimizations, contributing an additional $150 million to earnings in the quarter. On the next slide, I will summarize results versus the first quarter of 2020. Versus the first quarter of 2020, earnings increased by around $500 million. There was a total price margin improvement of about $1.3 billion driven by higher upstream prices and chemical margins as the market recovered. This is partially offset by lower downstream margins, but excludes the mark-to-market impact of unsettled derivatives, which was driven by the absence of a benefit in the first quarter of 2020. Cost reduction efforts, including structural efficiencies in maintenance, supply chain optimizations, and the announced workforce reductions contributed over $1 billion of improvement to earnings. Moving to slide 10, I'll provide further details on our cost savings and CapEx reductions. Excluding energy and production taxes, cash operating expenses were $9.2 billion in the first quarter, $1 billion lower than the same quarter last year. This reflects the significant structural improvements achieved in 2020 from our ongoing cost reduction initiatives. Capital expenditures were $3.1 billion in the quarter, on track towards the lower end of our full year guidance. This reduction of over $4 billion versus the first quarter of 2020 was enabled by the flexibility of our short cycle unconventional assets and by our ability to pace downstream and chemical projects consistent with market conditions. As Darren will cover later, we're able to do this while preserving the long-term value of the opportunities. Moving on to a summary of cash flow on slide 11. Cash flow from operating activities was $9.3 billion in the quarter. Excluding working capital effects, this was up $3.2 billion from the fourth quarter of 2020. Reflecting our ability to capture higher prices and margins, and the results of our cost reduction efforts. We reduced debt by more than $4 billion, consistent with our capital allocation priorities. We ended the quarter with $3.5 billion of cash. Turning to slide 12, I will cover a few key considerations for the second quarter. In the upstream, government mandated curtailments are expected to be in line with the first quarter. We expect lower volumes with seasonal gas demand and higher maintenance. The sale of the UK Central and Northern North Sea assets is expected to close near mid-year, subject to regulatory and third-party approvals. In the downstream, we anticipate demand improvement in line with third-party forecasts, with jet continuing to recover at a slower pace than gasoline and diesel. Higher scheduled maintenance and turnarounds are planned for the quarter. In chemical, we anticipate a tight supply and demand balance with ongoing industry maintenance impacting global supply, and we have higher planned turnarounds in the quarter. Corporate and financing expenses are anticipated to be about $600 million, and we expect to further reduce debt if price and margins remain at current levels. With that, I will now turn the call over to David.

Thank you, Steven, and good morning, everyone. It's good to be back with you. This time last year, I joined the call to discuss the challenges of COVID-19 and how we plan to respond. At that time, we were early in the pandemic, but the call to action was clear. We made some tough decisions and committed to bold actions. In our fourth quarter call, I reviewed our results and success we had in meeting, and in some cases, beating those bold commitments. We made a lot of progress over the course of a challenging year. The positive results we announced today reflect not only last year's work, the work we started years ago, work that has positioned us to take advantage of market improvements. Today, I join the call to put that work in context. I'll discuss the foundation for success that we've laid and how it will manifest in growing shareholder value. value that will further materialize as markets continue to recover and as the world transitions to a lower carbon future. Our successful response to the unprecedented challenges of 2020 has its roots in two critical initiatives started years earlier. The first was our focus on developing an industry-leading portfolio of advantaged investments to recapitalize our businesses and increase capacity to generate earnings and cash. Prioritized investments in these opportunities last year are paying dividends this year and will continue to well into the future. The second initiative, which began in 2017 and was completed in 2019, was the significant restructuring of our businesses, reducing functional silos, organizing along value chains, and consolidating competencies. This greatly reduced organizational complexity, interfaces, and overhead. It provided a clearer line of sight to the market, increased ownership for earnings at all levels, and improved the speed and quality of decision making across the corporation. Importantly, it helped our people better relate their work to our bottom line results. We see the benefits of this in the first quarter results. Through structural changes, we've permanently reduced operating expenses, capturing $3 billion in 2020 versus 2019. with further efficiencies in the first quarter and more expected through the year. In total, we expect to achieve $6 billion of annual savings by 2023 versus 2019. At the same time, we reduced emissions, operated safely, and delivered best-ever reliability performance. Our focus in this area also paid off in the first quarter with a well-managed response to the Texas ice storms. minimizing impacts and speeding recovery. Throughout 2020, we worked to strike a difficult balance, dramatically reducing near-term spend without compromising longer-term value. We used our balance sheet to maintain spending that was critical to shareholder value, including sustaining a strong dividend. We also maintained our work in advancing low-carbon technologies and developing projects with the potential to significantly reduce society's emissions. This work is crucial in underpinning our long-term future and in continuing to grow shareholder value. It also facilitated the launch of our low-carbon solutions business in the first quarter, a strategic business that we expect to grow with significant investments as we advance low-carbon technologies. We prioritize maintenance activities, ensuring essential work was completed last year and the remainder early this year ahead of the anticipated demand recovery. We reduced 2020 CapEx by 30% versus our original plan. We did this by pacing project execution and leveraging our global projects organization to prioritize and optimally slow projects. We are continuing to pace projects to rebuild the balance sheet and pay down debt. In the first quarter, we made significant progress. Investments are in line with our outlook for the year of $16 to $19 billion, and debt was reduced by over $4 billion. Throughout this time, we've never lost sight of the long-term fundamentals of our business. We knew economies would recover, populations and living standards would continue to grow, ultimately driving demand for our products and an industry recovery. Today, we are beginning to see this and are well-positioned. Thanks to our efforts over the last few years, we are a stronger company with an improving outlook. You will, of course, recognize this chart, which we've used since our third quarter call last year. At that time, we made the point that the pandemic had driven industry prices and margins to unsustainably low levels, and while hard to predict when, that margins and prices would rebound. And today we're seeing this rebound, which is happening faster than we thought, and for some sectors, rising to higher levels than anticipated. The upstream is back within the 10-year range, with Brent prices improving by roughly 40% since the fourth quarter, and natural gas up by about a third. In the downstream, margins remain well below the bottom of the 10-year range. Chemical margins, on the other hand, have swung from the bottom to the top. One thing is for sure, these margins and prices will continue to move. We've based our plans on a conservative outlook. and are positioning our businesses to be successful at or below the bottom of these ranges. At the same time, we're making sure that when the upswings come, we take advantage, which is why we went to great efforts to preserve our portfolio of investments while building in flexibility. It's also why we test each investment against a wide range of market scenarios and insist on structural advantages to generate leading returns at any price. Today's portfolio of opportunities is the best we've seen in 20 years. 90% of our upstream investments and resource additions over the next five years, including Guyana, Brazil, and the Permian, generate 10% returns at $35 a barrel or less. In Guyana, we're continuing to progress LISA Phase 2. Piara is on schedule, and we've begun planning for the next development, Yellowtail. The Bacalao Development Offshore Brazil is advancing toward a final investment decision. And we're delivering greater efficiencies in the Permian. Efficiencies that are driving down costs for drilling and completions while improving recovery rates and growing production. Based on these improvements and without additional capital, we've increased our 2021 outlook to between 410 and 430,000 oil equivalent barrels a day. The Corpus Christi Chemical Complex is ahead of schedule, with a projected startup in the fourth quarter. We expect to complete the project for about 25% less than the average cost of a Gulf Coast steam cracker. This facility is a key development in our plan to grow sales of high-value performance products by 60% through 2027. As we focused our activities on the highest value investments, we also worked hard to preserve the value of the projects we were pacing. As I mentioned, our global projects organization played a critical role in this, working closely with contractors, partners, and resource owners to find efficiencies and reduce spend. Every project was reevaluated and tested against conditions informed by the pandemic. While all remained attractive and in our portfolio, the highest value opportunities were given priority. PACE projects were evaluated for optimum breakpoints, with work continuing until these were reached. You can see this in the photos, which show the project status at the time the pandemic hit and when they were paused. Working closely with contractors, our team successfully offset deferral costs with efficiencies and market savings and preserved portfolio returns of greater than 30%. The CapEx Outlook we provided incorporates resumptions of these project activities over time as the market recovers and we make progress deleveraging. Striking the right balance in our capital allocation priority was critical, as demonstrated by the price and margin chart. This was particularly true in the depleting businesses of the upstream. The value of the choices made here are shown in the next couple of slides. We are excited by the results of the significant work and strategic investments made since 2017 to reshape our portfolio into one of the most price competitive in industry. generating strong returns in a variety of price environments. The chart on the left, similar to the one used on Investor Day, shows the Brent price needed for upstream resource investments made in 2020 to generate a 10% return. As you can see, more than 90% of the investments require Brent price at or below $35 a barrel. On the right are the anticipated cash flows resulting from the projects retained in our 2020 investment program. for this year and in 2025. As you can see, the investments we made in 2020 are making a significant contribution now and into the future. This is particularly true in the Permian shown on the next slide. Last year, we reduced Permian CapEx by about 35%, but maintained a level of investment to support our technology efforts and drive improvements. This work contributed to an additional 100,000 oil equipment barrels per day in 2020 versus 2019 and an increase of 60,000 barrels per day in the first quarter of this year versus the first quarter last year. This work also drove significant progress across a number of variables as shown on the left. Higher well productivity and lower costs resulted in positive free cash flow in the fourth quarter of last year, which will continue through 2021. In addition, with the Poker Lake processing facilities online and pipelines commissioned, we can ensure production is delivered to the highest value outlet at the lowest cost. Hopefully, these last two charts help illustrate the importance of striking the right capital allocation balance to preserve longer-term value, particularly in trying times. Our first quarter results help demonstrate this. We maintained our strong dividend, generated strong cash flow, delivered further cost reductions, remained flexible and disciplined in our capital spend, delivered excellent safety, environmental, and reliability performance, and advanced solutions for a lower carbon economy. As we progress through this year, we'll maintain our capital priorities and a balanced approach. Our planned capital range for 2021 remains $16 to $19 billion, with the out years at $20 to $25 billion. If markets take an unexpected downturn, we have the flexibility to adjust. If margins and prices stay higher than planned, we'll do leverage faster, rebuilding the balance sheet. As the price and margin chart I reviewed earlier demonstrated, things can change quickly. A strong balance sheet remains a critical advantage in a capital-intensive commodity business. It also provides an important foundation for managing an uncertain future and the transition of the energy sector. which I'll turn to next. I'll start by restating our strategy in addressing the risks of climate change and the energy transition, a strategy based on four pillars we've had in place for many years. It begins with mitigating emissions in our operations, which has been a focus for decades. Versus 2016, 2020 GHG emissions are down 11%. We met the methane and flaring reductions we committed to in 2018. and established aggressive emission reduction plans through 2025, putting us on a trajectory consistent with the goals of the Paris Agreement. We are committed to providing products to help customers reduce their emissions. Across the globe, we're helping economies decarbonize by providing natural gas for power generation, reducing emissions by more than a half versus coal. Our chemical products reduce vehicle weight, lowering transportation emissions, and preserve shelf life of food, reducing waste and agricultural emissions. Our fuels and lube products prove efficiency, also helping to reduce emissions. We're also proactively engaging on climate policy. We've demonstrated this through our support for the Paris Agreement, an economy-wide price on carbon, consistent regulations to reduce methane emissions, and frameworks to support investment in carbon abatement. And finally, we're focusing on developing and deploying scalable technology solutions that are needed to reduce emissions on a larger scale. We're focusing on the hard to decarbonize sectors of power generation, heavy duty transport, and industrial manufacturing. We've launched our low carbon solutions business to commercialize technologies and accelerate large scale emission reductions in these areas. Since 2000, we've invested more than $10 billion in lower emissions technologies. and have plans to invest an additional $3 billion by 2025. Our initial emphasis is on carbon capture and storage, or CCS, a technology critical to achieving the goals of the Paris Agreement. I expect the magnitude of investments to grow as we work with industry, governments, and communities to advance attractive project concepts that also generate shareholder value. Having said this, it's important to keep the current level of planned investments in perspective When you compare the investment levels of our upstream, downstream, and chemical businesses with the size of their markets, our spend represents less than 0.3% of the total addressable market. When you do the same for our planned investments in CCS, they represent over 3% of the total addressable market, more than 10 times the level of investments in our traditional businesses. We think this is reasonable given the early stage of this market's development. With our industry-leading position and decades of experience in CCS, we're well positioned to successfully compete in this growing and potentially large future market. As we've tried to illustrate in this chart, today we're the global leader in capturing CO2. In fact, we've captured more anthropogenic CO2 than anyone in the world. We have an interest in over one-fifth of the world's CCS capacity and significant holdings in CO2 pipelines. Grassroots, large-scale CCS projects leverage our competitive advantages in technology and project management, as well as decades of experience bringing new ventures to market. This is important, particularly for this potentially fast-growing, large market, and it's why we launched the low-carbon solutions business, which is evaluating and advancing plans for more than 20 new CCS opportunities around the world. Last week, we introduced the concept of a multi-industry CCS hub to capture and store CO2 emissions from the heavy industry around the Houston Ship Channel. We think a carbon capture innovation zone, similar to an enterprise zone where incentives and policies are designed to encourage economic growth, is a smart way to advance this idea. It would help bring together government incentives and private sector investment, along with new policies and regulations that would encourage innovation. Houston is an ideal location for a major project. The plants along the heavily industrialized ship channel represent some of the hardest sectors to decarbonize. They're also relatively close together, providing project scale and reducing unit costs. Houston's proximity to the Gulf of Mexico also provides direct access to suitable storage locations. The U.S. Department of Energy estimates the geology beneath the seafloor has the capacity to safely store all the CO2 that the entire country currently produces for the next 100 years. As currently envisioned, the project could capture 50 million metric tons of CO2 per year by 2030 and twice that by 2040. This would put Houston well on its way to reaching its goal of becoming carbon neutral by 2050. This concept will need support from many different parties, both private and public. Regulatory and legal support at all levels of government will be crucial for establishing incentives and attracting investment. The federal government already provides some carbon reduction incentives, such as tax credits for electric vehicle, wind, solar, and CCS. Enhancing these credits or establishing a market price on carbon emissions combined with appropriate rules and oversight would accelerate solutions. We've long talked about the importance of innovation. This multi-user hub concept is just one example of how we're looking to take on large, complex challenges and find solutions to help meet society's demand for a lower carbon future. This can play an important role in positioning the company to deliver long-term shareholder value. The first quarter results clearly show that we're on the right path and well positioned for a continued market recovery. We will remain flexible while focusing on disciplined investing in high-return, competitively advantaged projects. This will provide the foundation for strong cash flows, a strong dividend, and a strong balance sheet. We will remain relentless in structurally reducing costs by fully leveraging our new organization. We will continue to deliver industry-leading safety and reliability performance, meet our emission reduction plans, and help society transition to a lower carbon future. And we will do all this to grow shareholder value.