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Chevron’s Watson Takes A Bow, Recommends Chasing ‘Best Opportunities’

Chevron Corp. CEO John Watson helmed his final conference call on Friday for the San Ramon, CA-based supermajor, accepting congratulations from analysts, and waxing on about the state of the industry.

Watson bows out on Feb. 1, with Vice Chairman Mike Wirth, who now oversees downstream operations set to take over. The financial community judges CEOs by total shareholder return (TSR), Watson said, “and I'm gratified that we outperformed our peers during my tenure. That's an outcome my two predecessors established as a precedent and we certainly owe much of our success in this long-cycle-time business to those that came before us.”

On his first day as CEO in 2010, oil was priced at $80/bbl and Henry Hub natural gas was above $6.00/Mcf, he noted. Despite the volatility in prices, “the company has weathered the downturn, adjusted rapidly to new conditions and is well-positioned for the future.”

The upstream business “can sustain itself at current prices thanks to an enviable unconventional position highlighted but not limited to the Permian,” he said. Australia, where Chevron has leading liquefied natural gas export projects at Wheatstone and Gorgon, “will deliver earnings and cash flow for decades…” And the “tightly configured, high return” downstream and chemicals business is designed to complement the upstream.

That said, while Chevron has been a strong performer, the energy sector overall hasn’t created a lot of value for the past decade, in part because of volatile commodity prices and in part because of capital allocation. Watson was asked what his message would be to the next generation of energy industry CEOs.

“If you look at our TSR since I started, it is just under 10%,” which may lag the S&P 500, “but there's no getting away from the fact” that what investors may have missed are the leading technology innovations that have transformed the industry.

“If you look at the miracle of hydraulic fracturing that's taken place really since 2010, that's put supply on the market that we didn't anticipate,” he said. “I think the message really is that we're a pretty resilient bunch in this business. When prices go up, technology keeps moving, and we're able to respond to that very well as an industry. So never underestimate that ingenuity, if you will, because we're very, very good at what we do.”

The energy industry doesn’t get the attention it may deserve as being a technology giant, he said, “but clearly we have been, and that resulted in a transition. We are in a commodity price business and we really have to focus on the lowest cost projects and opportunities that we have, regardless of the ups and downs that we'll see on a transitory basis in the commodity market…

“I suspect...that if we had commodity prices that were in the range that most of us anticipated, we would all have performed a lot better,” he said.

“The message is, be a little bit wiser about the quantity of projects that you take on, be very wary of the capabilities in the supply chain during those busy times, and...pursue your best opportunities...That's what we are doing right now.”

For example, the legacy Permian Basin properties are outperforming, and the emerging Vaca Muerta unconventional play in Argentina remains to be developed. Chevron also has a portfolio in the Marcellus Shale ready to ramp.

Those “big shale opportunities...are very low cost,” said the CEO. “We've got continuing base business opportunities, and we're trying to drive down the costs in some of the longer cycle time projects, but the emphasis will be on getting a lot out of the assets that we have, particularly during this period where commodity prices are, may be lower than many have anticipated.”

The outlook for unconventionals/shale “is nothing but good,” he said. “I think we'll be in a position to grow production for a period of years just from the shale, frankly, and the projects that are continuing to come online and ramp up...I think looking forward, with the continuing ramp-up of major capital projects and the success we're seeing in the Permian and elsewhere, it'll be a good news story.”

At the start of 2017, Chevron had estimated that excluding asset sales, production would be up 4-9% this year. After nine months, production has risen about 6% from 2016. “We now expect the full-year growth to be in the range of 6% to 8%,” Watson said.

Permian volumes alone totaled 187,000 boe/d in the third quarter, up 30% year/year. “Based on our tight curves and costs, we expect to recover an average of about 1.9 million bbl/well with $14 /bbl capital, operating and overhead expenditures.”

Worldwide production increased year/year to 2.72 million boe/d from 2.51 million boe/d. U.S. production averaged 681,000 boe/d net, down by 17,000 boe/d from a year ago.

However, U.S. shale and tight production increased 39,000 boe/d, primarily on growth in the Midland and Delaware sub-basins in the Permian Basin. Permian volumes totaled 187,000 boe/d, up 30% year/year. The net liquids component of production increased 1% to 525,000 boe/d, while net natural gas production decreased 13% to 932 MMcf/d, primarily from asset sales.

Meanwhile, capital expenditures were $3.2 billion for the quarter, about $800 million lower than in 3Q2016.

“Capital operating expenses continue to trend down,” Watson said. “Capital expenditures average $4.5 billion per quarter this year, down by more than half from three years ago. Following the normal entry year pattern, fourth quarter spend will be higher, but we expect full-year capital expenditures will be less than $19 billion.

“We're also controlling operating and administrative expenses well. Average quarterly costs are down again this year, about $450 million per quarter lower than last year despite higher upstream production and 22% lower than 2014. We expect unit cost in the upstream to continue the downward trend.”

The supermajor reported quarterly profits of $2.0 billion ($1.03/share) versus $1.3 billion (68 cents) in 3Q2016. Sales and other operating revenue increased to $34 billion from $29 billion.

U.S. upstream operations incurred a loss of $26 million in 3Q2017, compared with a loss of $212 million in the year-ago period. The improvement reflected higher crude oil realizations. Average crude/liquids sales price was $42/bbl, versus $37 a year ago. The average sales price of natural gas was $1.80/Mcf, compared with $1.89 in 3Q2017.

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