Good morning. My name is Sean, and I will be your conference facilitator today. Welcome to Chevron's First Quarter 2010 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' remarks, there will be a question and answer session and instructions will be given at that time.
As a reminder, this conference I will now turn the conference call over to the Vice President and Chief Financial Officer of Chevron Corporation, Ms. Pat Yarrington.
Good morning. Thanks, Sean, very much. Welcome to Chevron's Q1 earnings conference call and webcast. Jeanette Arata, General Manager, Investor Relations is on the call with me. Our focus today is on Chevron's financial and operating started, please be reminded that this contains estimates, projections and other forward looking statements.
We ask that you review the cautionary statement on Slide 2. Slide 3 provides an overview of our financial performance. The company's Q1 earnings were $4,600,000,000 or $2.27 per diluted share. Our Q1 2010 earnings increased about 150% compared with the Q1 of 2,009. Our upstream business benefited from higher crude oil prices and higher production.
Net oil equivalent production was up about 5% from a year ago due mainly to the ramp up of major capital projects. Downstream earnings were lower reflecting the absence of 2,009 gains on asset sales as well as 2010 charges related to previously announced employee reductions. 1st quarter 2010 earnings rose 48% compared to the Q4 of 2,009, which Jeanette will discuss shortly in more detail. Return on capital employed for the trailing 12 months was about 13%. The debt ratio dropped below 10% at the end of the quarter.
And finally, we announced on Wednesday that Chevron's Board of Directors is only 9 months after the previous quarterly increase, which was in the Q3 of 2009. Turning to Slide 4. I'll now compare results of Q1 2010 with the Q4 of 2009. As a reminder, our earnings release compares Q1 2010 with the same quarter a year ago. 1st quarter earnings were about $1,500,000,000 higher than the 4th quarter.
Higher crude oil and natural gas realization as well as lower operating expenses benefited the company's worldwide upstream results. Downstream earnings were also higher, mostly the result of improved refining margins across all regions and the absence of unfavorable 4th quarter inventory effects. The variance in the other bar reflects lower corporate charges. Earnings in the Q1 included charges of $175,000,000 associated with employee reductions in the downstream businesses and corporate staff. As I alluded you in our 4th quarter earnings call, we have done some resegmentation of reported earnings and I'd like to go through those changes with you now.
Starting this year, both our chemicals businesses, meaning Auronide Additives and our Chevron Phillips Chemicals joint venture report to Mike Wirth. Their performance results are now included in the Downstream business segment. In addition, certain upstream enabling operations, primarily the Esquavos Gas to Liquids project and major international export pipelines have been reclassified from the Downstream segment to the Upstream segment. These upstream enabling assets are fundamental to the success and economics of their related upstream operations. In our judgment, the revised segmentation more appropriately aligns current and future visions with segment performance results and management oversight responsibilities within the company.
Prior period information has been conformed accordingly. And for transparency, we have footnoted the for each impacted segment to provide earnings for the comparable periods using the previous reporting methodology. Jeanette will now take us through the quarterly comparisons for each of
the business segments. Jeanette? Thanks, Pat. On Slide 5, our U. S.
Upstream earnings for the Q1 were $90,000,000 higher than the 4th quarter's results. Average U. S. Crude oil realization was up about $3 per barrel between consecutive quarters, slightly more than the increase in the average spot price of West Texas Intermediate. Natural gas realizations increased 25% between quarters, in line with Henry Hub spot prices and represented about half of the positive variance.
Lower production volumes decreased earnings by $80,000,000 between periods. This was primarily due to the absence of a favorable royalty settlement recognized in the prior The other bar is comprised of a number of offsetting items. Turning to Slide 6. International upstream earnings were up about $470,000,000 compared with the 4th quarter. Higher oil and natural gas realizations realizations increased earnings by $145,000,000 Average realizations for liquids rose 2% in line with
about
reflects small reductions across multiple categories and operations. The other bar represents an increase of $113,000,000 and includes various unrelated components, the largest being a favorable variance in tax items. Slide 7 summarizes the quarterly change in Chevron's worldwide net oil equivalent production. Production remains strong in the Q1 and increased 5 1,000 barrels per day. Higher prices reduced volumes under production sharing and variable royalty contracts by an estimated 5,000 barrels per day.
WTI prices averaged $79 per barrel in the first quarter versus seventy $6 per barrel in the 4th quarter. For the Q1, each dollar increase in WTI resulted in a 1800 barrel per day volume reduction. This is in line with the 2,009 average rate of roughly 1500 barrels per day per dollar change in WTI. Base business production decreased 1% yielded favorable gains and minimized declines to date. In addition, as shown in the green bar, incremental production for major capital projects benefited 1st quarter production by 37,000 barrels per day.
Primary drivers were ongoing debottlenecking efforts at Tengiz in Kazakhstan and the continued ramp up of major capital projects, most notably at Frage in Brazil and Tambula Landana and Mafa Mira Norte in Angola, where new production wells came online. At this time, it is too early to update our full year production outlook of 2,730,000 barrels per day. We have several major turnarounds scheduled for the 2nd and third quarters and storm effects may come into play later in the year. We are very pleased with the Q1 production levels and intend to provide another update at the Q2 earnings call. Turning to Slide 8.
U. S. Downstream results increased more than $400,000,000 in the first quarter as market conditions Refining margins strengthened from depressed 4th quarter levels in both the Gulf Coast and West Coast with Gulf Coast margins increasing almost 50 Operating expenses were $145,000,000 lower between periods, in part due to the absence expenses associated with the 4th quarter planned shutdown at the El Segundo refinery and a non recurring charge recorded in the 4th quarter related to the exit of certain U. S. East Coast markets.
We recorded a $50,000,000 severance charge in the Q1 related to previously announced employee reductions. Chemicals results were $60,000,000 higher, mainly due to improved margins for olefins and aromatics. Multiple components made up the other bar, On Slide 9, international downstream operations also improved significantly, increasing by about 4 $50,000,000 from the 4th quarter's results. Higher realized margins improved earnings by 3.40 160%. As in the U.
S, we recorded a severance charge of $100,000,000 related to previously announced workforce reductions for our international operations. Timing effects resulted in $170,000,000 positive variance between quarters, primarily due to the absence of negative inventory effects recognized in the 4th quarter. The other bar was a small net benefit for the quarter, reflecting lower operating expense and higher shipping and chemical results, partially quarter net charges were $368,000,000 compared to a net $418,000,000 charge in the 4th quarter. The $50,000,000 decrease between quarters is mostly due to favorable variances in tax items and other corporate charges. A 20 $5,000,000 severance charge related to workforce reductions was recognized in the Q1.
Our quarterly guidance range of $250,000,000 to $350,000,000 for net charges in the all other segment is still appropriate going forward. Pat will now our operational and strategic progress.
Pat? Okay. Turning now to Slide 11. Let's start with our operational performance so far in 2010, where we've had excellent performance in safety, reliability and production efficiency. Following up on a record year of safety, we're off to an even better start here in 2010.
Our refinery network continued to operate reliably and upstream production efficiency continued to climb as evidenced by our strong production volume. Also, our diligence and cost management is continuing to yield positive results. Excluding one time employee severance charges recognized in the Q1, operating and SG and A expenses were flat between comparable year to date periods, sustaining the gains that we realized in 2,000 and 9. This is against the backdrop of a 5% production increase and a doubling of crude prices across the comparable Q1 period. We're pleased with the results from our ongoing cost management efforts.
In the upstream, Perdido reached 1st oil at the end of March. This is the first commercial production from the lower tertiary trend in the deepwater Gulf of Mexico. Sole facility capacity is 130,000 barrels of oil equivalent per day. In March, we announced that the Discoverer Inspiration, an ultra deepwater drillship, commenced operations in the Gulf of Mexico. This is the 2nd state of the art vessel commissioned by Chevron in the last year.
Both vessels are designed to Chevron specifications and will work on a strong queue of deepwater opportunities. Also in the Gulf of Mexico, we were the apparent successful bidder in a our leading position in this very important basin will help advance our robust portfolio of projects. In the Downstream, we continue to progress our restructuring plan. Our new organizational structure has been finalized and we're in the process of filling key We're on track to achieve our 2010 targeted year end workforce reduction of 2,000 employees. We're also on schedule to complete the as appropriate.
And finally, we generated very strong cash flow in the quarter, totaling 2,500,000,000 dollars after paying the dividend and funding our capital program. Cash generation from the major capital projects started up in the last two years is proving to be very robust. In addition, based on preliminary results, our upstream portfolio's earnings per barrel continued to outpace our competitors, giving us the leading position among our peer group for the last three quarters and the gap has widened here 2010. At the end of the quarter, net debt is once again negative as our cash balances exceed our debt levels. Net debt is back to year end 2,008 levels.
And since 2,008, we have grown upstream volumes by an impressive 10%. This growth was self funded and we simultaneously weathered the low point in the commodity cycle while also growing our dividend. We're executing our strategies well and they're paying off. And it's our intention to and we are confident that we can maintain this strong performance momentum. So that concludes our prepared remarks and I'd now like to open it up for your questions.
Sean, please open up the line.
Our first question comes from Doug Terreson of
Good morning. Good morning.
So today, there's commentary regarding a ban on drilling in new areas in the United States, although it's not really clear to me exactly what that means. And on this point with the Chevron being one of the more proficient explorers in the Gulf in recent years and I'm sure pretty close to the BP situation. I wanted to see if you could provide any insight into this information that is if you have any and how it changes your exploration plan if at all?
Right, Doug. I mean, as you know, this is breaking news. And let me just say that, first of all, our operations in the Gulf to date have not been impacted by this incident. We do see the press releases of the media reports this morning that say that existing lease sales that are currently planned will go ahead. We have no information to the contrary.
We haven't heard anything kind of yes or no on that. We're certain that there will be a full investigation and that a root cause analysis will be done and that it will be widely shared. And beyond that, we're not really in a position to go much further with that.
Okay. I wasn't sure either way. One more question. You guys have obviously done a really good job on cost productivity during the past couple of years. I think your operating expenses were lower by 15% last year alone.
And on this point, on Slide 8, you guys talk about
how well, it appears as
if you may have already captured around 1 third of the $400,000,000 in non fuel savings in refining that you talked about the Analyst Meeting. So my question is whether or not this is the correct way to think about it or whether after normalizing for El Segundo and the one other item that I think Jeanette mentioned that progress on the cost objective is different. So can you provide color on this item? Is this the correct way to think about the objective?
Doug, I think a big piece of improvement you see is we're coming off a high 4th quarter expense range. So I wouldn't that's more, I think, activity driven. I wouldn't contribute it to the refining goals that we set ourselves set for ourselves in March.
Okay. And that refers to both of those items that you highlighted on the call?
In terms of operating expenses here?
Yes.
Right. I mean, we talked about the absence of the planned El Segundo refinery shutdown that occurred in the Q4. So relative to Q1, you've got a variance there, a positive
variance there.
Okay.
And we also talked about we took expenses associated with the excess of certain U. S. East markets in the Q4. Don't have those again.
Okay. No, I follow that.
I just want to make sure that was the bulk of the number. Okay, that clarifies it. Thanks lot.
That's right. Thank you.
You're welcome.
Evan Calleo of Morgan Stanley is on the line with the question. Please state your question. Good morning, everybody.
Good morning. Good morning, Evan.
Another great quarter here. I have a question on the balance sheet and your comments, your positive $3,000,000,000 free cash flow in the quarter, driving an increase in your cash balance. Can you generally discuss what cash levels Chevron considers reinitiating a buyback or conversely looks to increase CapEx spend on the year? And I have the second question.
Yes. No, that's a great question. I think priorities is always very important. Really, we look at this in terms of our uses of cash, the priorities are to increase the dividend, sustain and increase the the dividends. We did that, did it only 9 months, not a year after the previous increase.
We then fund C and E. We've got a good opportunity set currently underway and a good opportunity set ahead of us. So a big queue of attractive projects. We'd also look to keep our balance sheet flexibility for future opportunities. We look at funding our pension plans as appropriate.
And it's only after we've done all of those factors and sort of met those sort of hurdles that we look at share repurchases. So on a go forward basis, in order to reinogurate or reinstitute the share repurchase program, we're going to have some cash in excess of our ongoing operating prices. We're going to have to see what I would call sustained positive surplus cash generation going forward. So our outlook would have to suggest that. And I think we're going to have to have confidence in our ability to be able to sustain meaningful share repurchase program.
We don't want to be in a position of sort of turning this on and off. And while I'm very pleased with our current balance sheet position and the cash generation from our projects, I'm not in a position to say that I see all of those criteria exactly being met. I think we have a great track record, frankly, of doing this balance on uses of cash quite well. I think our shareholders have been well rewarded with the choices that we've made here. And our intent is to
a question is a little bit on an Ecuador update. I mean, I know you've had a lot of progress in the recent quarter and you won the Southern District on the challenge to proceed in the HAG and you were awarded the $700,000,000 subject to a tax determination against Ecuador Ecuador? And any idea on maybe timing on your recent motion to strike the expert report in the environmental matter in Lagoagrio and maybe any interplay between the state level actions and the environmental case would be helpful.
Okay. Well, let me just take them here hopefully one at a time, see if I can knock those off. In terms of the international arbitration ruling, and for those of you who maybe aren't quite familiar with that, this is where the international court ruled a favor of Chevron for approximately $700,000,000 in damages and interest related to a long standing set of commercial claims. And they found that the Ecuador court had violated international law basically through delays and rulings on certain disputes between Texaco and the Ecuadorian government. The case is separate from the Lago Agrio case.
In terms of next steps about collecting on that, I wouldn't put that in any of your models anytime soon here. There's quite a degree proper tax rates to apply to that. So I think you need to think of that as being still covered with a great deal of uncertainty. The Ecuadorian government has said that they're going to seek annulment of the ward, but we don't they haven't identified any basis upon which they can do that. In terms of the local court proceedings, there really hasn't been a significant change in sort of timing identified basically with Mr.
Cabrera. He's the individual who was appointed by the local court to make the remediation assessment. And it's been found out that he has an ownership position in a remediation company that stands to benefit financially from any judgment against Chevron. So he's got an obvious conflict of interest and he didn't make that known to the court. We've asked the court to reject his work.
The courts denied that request. And then we also have had one of the technical experts for the plaintiff has testified that his reports were or that reports were submitted to the local court under his signature, but they were not his report. And he has said that he never concluded that the sites posed a risk to human health or the environment. So we've had a number of positive developments. But all that being said, I don't think it changes some of the finished with a lot of its procedural components, I think we still have to wait and see what the steps are going to be.
Okay, great. I appreciate that.
Our next question comes from Doug Leggate of Bank of America Merrill Lynch.
Hi, thanks. Good morning, Pat and Yanet.
Good morning.
Hi. I don't know if this you're going to be able to answer this one terribly easy, but we monitor, I guess you could call it your upstream capture rate, which is looking at your kind of worldwide oil and gas prices weighted by volumes and your net income. And for quite a while, it was a fairly stable relationship. The last couple of quarters last year, it fell out of bed a little bit. And this quarter and last quarter, this quarter in particular, it has been pretty stellar.
It's a terrific result in the particularly in the international upstream. So my question is, is there something changing there? This is on net earnings basis obviously. So I'm thinking is there something changing in the DD and A level? Was there a tax benefit that was particularly this quarter?
Obviously, your tax rate was a little low. If you could just give some color as to whether or not this is something that might actually be sustainable because as I say, it was a pretty terrific capture rate this quarter?
Well, I don't have your numbers in front of me, Doug. But for DD and A, we were compared to for Q4, DD and A was essentially flat. There really wasn't anything too unusual going on in DD and A. And A. Compared to Q1 2019, DD and A was up 7%, but our production over the time period was up 5%.
So that was really what was driving that. So nothing terribly unusual.
What about on the tax line?
Well, I was just going to follow-up on the tax component. I don't know if that's what you were going to ask here. But just on taxes, I mean, we did see a lower effective tax rate in the Q1 compared to the Q4 and also compared to last year's Q1. And that really in both periods reflects just jurisdictional changes, not only within the upstream country by country analysis, but also between upstream and downstream. And then also, country analysis, but also between upstream and downstream.
And then also, for example, in the international sector, we did there was a change, a reduction in Canadian corporate tax rate that applied in the Q1, for example, which was baked in there.
So would it be I mean, guidance is not something you normally give on tax, but should we expect that the tax rate is going to be kind of lower than your legacy run rate given that change?
I think that it's too early to kind of give that sort of a forward indication. Taxes are really very lumpy and it really is dependent upon earnings profiles across the jurisdictions.
Okay. Just second one, if I can squeeze it in. On the major projects that you brought on stream, obviously, a lot of these were liquids rich, I guess, or liquid heavy. Where are we in terms of the growth in those projects now? Are they now at plateau?
I guess, Perfido is probably not. But in terms of the other major projects you brought on last year, are they all now at sort of full rate? And if you could give some color,
that would be great. I think largely the answer to that broadly would be yes. I mean, Perdido just came on at the very tail end of this quarter here. So that obviously has a ramp up profile that is much more extensive. It will take quite some time.
Just a tremendous accomplishment for the quarter. We mentioned Massimera Norte, it's hit peak production here at 42,000 barrels a day. And Frage, Frage continues to ramp up and we're very pleased with the progress that we've seen here, particularly most recently. Production is about 60,000 barrels a day from 5 wells. So I think there will be continued some continued ramp up.
But in the broad answer, I think we have seen the vast majority of the ramp up.
Got it. Thanks a lot.
Our next
Nice inflection point in terms of the earnings power of the Downstream that became apparent during the quarter. My question is, are indicator margins for the West Coast and Singapore, 2 areas that you have significant exposure to, would indicate that strength was actually building in April relative to what we saw late in the Q1 and certainly for the quarter as an average. Would you be able to confirm that the margin environment you're facing in those two markets is improving and that you're able to capture those margins?
Yes. Doug, I think our best view really right now in both those locations would be that you may have some softening going into the second quarter because what was driving these really related to refinery maintenance and turnaround schedules. And depending upon how those units come back online, the extent to which they come back online, again relative to demand, you may still have some sloppiness in the market.
Okay, great. And the second one if I could. The LNG market is obviously starting to swing towards the favor of the buyer versus the seller right now. Can you tell me if there's been any progress made on incremental marketing of the Wheatstone volumes that are not committed right now?
Right. I mean, right now, we have about 60 percent of the Wheatstone volumes that are under HOAs or tentatively committed here. We continue to have tremendous interest on the part of prospective buyers. We'll update you as those HOAs come to fruition, but we haven't seen really any softening in interest for our particular product slides.
Okay. Thanks very much, Pat.
Thank you.
Our next question comes from Paul Sankey with Deutsche Bank.
Hi, good morning.
Good morning, Paul.
Just going back to the Deepwater Horizon disaster, I was wondering if you could just help me list the risks to Chevron from this instance. I'm sure you'll confirm that there's no obviously no direct liability for Chevron, but some of the things that come to mind are the potential for a suspension of leasing, I think is coming out of the White House this morning. There's obviously the potential for a suspension of activity in the Deepwater GOM. I'm thinking higher safety costs. I was wondering whether you thought that would be an impact, perhaps even higher taxes.
There is, I guess, the potential for oil movements to be disrupted. I don't know what your thoughts are on that and whether you're thinking about, for example, supply to Pascagoula or whether or not that might be a total red herring. And then of course there's the overall industry risk. But if you could just kind of throw out there what you perceive to be the risks. And again, as I said, assume confirm that there's no direct liability that would help us begin to get our arms around this issue.
Thanks.
Yes. I mean, Paul, you've outlined a number of the risks that I'm sure are in everybody's minds. I really can't speak to any of those at this point in time. It's really just too premature. I would imagine I mean, there's tremendous interest as we all can appreciate, tremendous interest in trying to first stop the flow of oil, make sure that we've got containment and cleanup, want prejudge or leap too quickly.
I'm sure the administration and members of Congress won't want to be doing that either. So I really just don't know how this is going to play out. It's just too early to
say. Have you guys ever had any kind of a similar yourself?
We've had an absolutely outstanding safety record and I can't think of one here recently that comes to my mind. We've been operating globally, well, for decades and do not have any that comes to my mind at this point in time. We have
an outstanding safety record.
Yes, I
understand. This is not our incident and we are not in any way touched by this.
Directly,
from a operating standpoint. We have offered assistance to BP and to the MMS and to government entities, and we've been taken up on those that offer. So we stand ready just as everybody in the industry stands ready to put collective intelligence and capabilities to work to get this handled.
Yes, that's great. Obviously, what would be the exact nature of the assistance you would give?
Look, I mean, whether it's equipment, people, processes, anything that we can that they feel we can offer, we're happy to do it.
But as such, it's an offer with no direct you haven't actually done anything as such yet?
No, no. There have discussions between ourselves, government agencies, BP, etcetera. I mean, there is it is a consortium of effort that is underway here. That's really all I want to that's really all I know and that's really all I can say about it.
Yes, I understand. Absolutely. It's just obviously we're all trying to get our arms around this disaster and let's just hope it all works itself out. Just a very brief follow-up, your volume, can you just talk again about your volume target for the year? Obviously, you're chasing ahead of that.
Any about, I guess, there's an implied slowdown later in the year, but if you could just update us on the very latest after a strong Q1? And I'll leave that. Thank you.
Yes, that's a good question. That's a fair question here. We had production for the quarter of 2,780,000 barrels a day. It's 90,000 barrels a day ahead of our external guidance on a price adjusted basis. We talked about it being principally related to our base business performance where we've had good reliability and good optimization of facilities basically here.
So our production efficiency has been running about 3% higher than our plan. Now on the go forward here, we do have a number of turnarounds that are planned in the etcetera. We also can get into weather related issues in Q3 in particular, 2nd Q3 in particular. So while it's a good quarter for us and it bodes well going in, we were not in a position where we want to give an update this point in time. We'll come back on in the Q2 call and be happy to do that for you.
Yes, that's great. Is it fair to say that your Q1 volumes were ahead of what you had planned in terms of when you gave the original?
Yes, absolutely. And that's because of the reliability factors that we've gone through with you. We're just very pleased with how well all our facilities are running.
Our next question comes from Ed Westlake with Credit Suisse.
Thanks. Good morning. Obviously, very interesting week. Just in terms of the CapEx outlook, you've obviously got Gorgon and Wheatstone coming in, but you've got projects like Abami, Tengiz, which were very expensive coming out. What sort of can you comment at this stage in terms of the type of CapEx run rate that you'd expect not just for this year, but for outer years?
And is that one of the reasons perhaps why you're holding back in terms of buybacks?
All right. It's a good question. I mean, our C and E, we typically only give C and E targets out 1 year. And we do that for a variety of industry cost levels. So I'm not going to talk to you about 2011 and 20 12 or 2013 capital spending And we do have large projects coming on, Gorgon and Wheatstone, they're in the horizon certainly, but you need to keep in mind that we also are coming off of and have placed into service a number of high capital requirement if
you're thinking forward here a little bit, I
don't think you should think if you're thinking forward here a little bit, I don't think you should think about seeing any sort of dramatic increases in C and E. But at the same time, we've talked and I think George has been was pretty articulate about this at our meeting in March. To the extent that we see economic investment opportunities, and I'll talk to incremental oil development opportunity, for example, in base business. Or if we look forward a couple of years or whenever U. S.
Gas prices get to be sustained at a higher level, George talked about being able to bring on developments at the Piance and Haynesville. So at the same time, you shouldn't be surprised to see necessarily an uptick because that will mean that we have found very good economic opportunities for incremental C and E spending.
And maybe a follow on. I mean, is the, I guess, feeling that you're too early in terms of comfort level about all of those five factors that you outlined in terms of doing the buybacks. Is any of that related to some concern about the risk that Gorgon and Wheatstone CapEx might end up being a little bit higher than you've currently
budgeted? No, not at all really. We're very early days into the Gorgon and Wheatstone developments. On Gorgon, we've contracted for about $22,000,000,000 of the we've awarded early in the queue of spending compared to other LNG projects in that arena, we think we're in an advantage place, cost wise, price wise, contract wise.
Our next question comes from Paul Cheng with Barclays Capital.
Hi, good morning.
Good morning,
Paul. Pat and Jeanette, Pat, you gave a number in your presentation that the base operation sequentially from 4th quarter down about 27,000 barrels per day or 1%. Do you have that number for the Q1 versus?
I don't have it with me, Paul. You can give me a call, give it to you later.
And I presume that that is probably end of that much lower as you indicated about 3% better than your current plan. Do we have any kind of timing issue in terms of a work over just finish and as we saw that we have a big jump in near term production. So trying to understand that, is it just a normal better efficiency and better reliability or we have some timing issue related to the benefit in the Q1?
It's primarily better reliability that Pat talked about. There was our Malinpaya operations were down for a turnaround during the Q1, but that's really the only unusual activity.
Okay. The second quick one is that the headcount reduction, is all the people related to the 7 charge in this quarter, are they all left the company already? And if they are not, when do you think the saving will start to fall through into your bottom line? And what is the target one way from those headcount reduction saving will be?
Right. So the total accrual, dollars 175,000,000 relates to a total of 3,800 employees spread across downstream and then the other corporate staff group areas. We expect on the downstream side that 2,000 will hit that target for downstream by the end of this year. And I would say, the vast majority of that 3,800 will occur in by the end of 2010, early 2011. Certainly, within the 2 year window, you will have all of those reductions occur.
In terms of a run rate, not all of these savings from headcount reductions are baked in certainly not to our Q1 plan, probably not likely to see much of an impact in the second quarter. It would really only be as you moved into the 3rd and 4th quarters that you begin to see that impact and the full effect really will be towards the end of 2011.
And that I know you guys talking about the 400,000,000 non fuel saving, of which how much of them is related to headcount reduction?
I'm sorry, I'm not understanding the question.
The saving that 3,800 people that when they all left, what is the actual savings to the P and L going to look like?
Right. I don't have a number for you on that because it's again spread across downstream and corporate staffs and whatnot. It clearly is partly baked into the 7% ROCE improvement that Mike Wirth talked about in our security analyst meeting. Part of the efficiency improvement that he talked about obviously relate to the streamlining that we're working to do and headcount is a piece of that.
Okay. Final one, I think for Gorgon and Rich Dong, I think there's a lot of concern with a lot of new LNG project coming on stream, even though you guys are ahead of time, but towards the tail end by 2013, 2014 labor could be pretty tight. Pat, can you share with us that in terms of how you guys manage it or how the contract is being set? Is it a turnkey and that is a fixed amount or that you are still subject to the spot rate for the labor market by Q3 during the development phase?
Yes. I mean, I think as far as I want to go on saying this, this project has been in feed and kind of well scoped out, probably amongst the best of any significant major capital projects in the globe. And so we have had a lot of opportunity to work very hard on the contracting strategy and the contracting plan. And as I said, we've executed $22,000,000,000 of awards against that. So I think we're getting it's a very competitive project here and there's lots of contracting to it.
And I don't really want to generalize or get specifically into contracting strategy here with you. We're confident that it's going to be a very competitive project once up and running. And so far, we're on schedule and we're on plan.
And can you tell us that on the labor side, is that still make you subject to the spot market of the labor
or not really?
I mean, you don't market of the labor or not really? I mean, you don't have to tell me exactly what's the term, but I want to see whether you are still exposed to the spot market of the labor market?
Well, as far as I want to go is just to say, look, it's in everybody's interest, our interest, government's interest, labor's interest to get this project online under the commitments that were agreed to at the time that we sanctioned the project. We have strong government support and everybody understands certainly locally there how important Gorgon is to the local economy. So we're confident that we'll be able to get the labor that we need at competitive prices and have an economic project. Paul, I think I need to turn it off turn it over to somebody else here, if you don't mind, give somebody else a chance. That's fine.
Thank you. Thank you.
Our next question comes from Mark Gillman with Benchmark. Guys, good morning. I had
a couple of specific things if I could please. I believe either Jeanette or Pat mentioned a day capacity at TCO. Is that just liquids and is it sustainable?
That's just oil, Mark. You're correct.
And sustainability, Jeanette?
It's looking very good right now.
Regarding the tax item that was mentioned in the international upstream, the Canadian statutory implications, is there a positive deferred tax one timer that was but I'd say here,
Mark, I
know we were trying
to get at taxes. I mean, but I'd say here, Mark, I know we were trying to get at taxes. I mean, that was one piece that was relative and it was a small piece, but directionally, it occurred in the quarter. I think it's very hard to give any more information about taxes on a predictive sort of basis for you?
I'm not asking for a prediction. I'm just asking for the one time effect of the deferred tax adjustment that went along with that statutory change. Production versus the Q4 was up, yet there was no mention of volumetric effects in the international upstream. Jeanette, in your discussion, should I assume that liftings were flat period to period and that's why there was no volume mentioned?
Well, we're under lifted in the Q1, if that's what you're asking.
In other words, lift 1?
1%. It's not that big.
What was the amount? I'm sorry.
1%.
And that's a shortfall of liftings versus Q1 production?
Correct.
Okay. One final one. Your deliveries in production in Bangladesh on the gas side have been constrained in the recent past by logistical infrastructural and perhaps some contractual considerations. Looks like they jumped up pretty good in this period. Is this a signal that those issues have been resolved?
There certainly has been increased demand in Bangladesh, and we're continuing to debottleneck our existing facilities. We still do have pipeline constraints of getting the gas out. So we still have more resource if we can work through those.
Okay, folks. Thanks very much.
Our next question comes from Pavel Molchanov with Raymond James.
All right. Thanks very much. Two questions if I may. First, can you update us on anything you've heard in Kazakhstan in terms of the contract review or tax review announced by the government? And is there any effect on TCO?
You're speaking to Kerkzaknak?
T
I'm not sure what you're referencing tremendous long standing business there. We've got tremendous long standing business there.
So in other words, no tax review regarding Tengiz?
No tax review regarding Tengiz. That's why I was asking if you were talking about TCO is kind of fundamentally our operation here and good long standing relationship, good agreement on contracts, sanctity of contracts, well entrenched, well everything is working quite well there. And in terms of the karategonec issues, really, we need to refer you to the operator there. We're certainly just hopeful that the issues that are under dispute can come to conclusion quickly.
Right. In other words, no read through for Tengiz of any kind?
No read through for Tengiz.
Okay, great. Second question, your shale gas acreage in Poland, I think you have about 1,000,000 acres. Any timetable on when you might commence activity?
Yes. It's our plan here to do seismic work in 2010 and probably look to begin drilling in 2011.
Very good. Our next question comes from Fazil Al Khan with Citigroup.
Good morning. On the international upstream side, the $215,000,000 of OpEx improvement sequentially quarter over quarter, Is that number kind of sustainable through the entire year? Or does that actually get better? Are we going to still see improvements going into the second and third quarters?
No. I mean, I think we'd like to get another quarter under our belt here. I mean, in the quarter, there were the cost reductions or op expense reductions that we saw were really kind of all over the place in terms of countries as well as cost categories. And I think that the way to look at this is 4th quarter typically is a higher op expense quarter for us. 1st quarter is oftentimes a lower op expense quarter for us.
So I think you want to look at previous patterns in terms of your projections going forward.
Okay, got you. And then in terms of the production volumes that look like they were still ramping up out of Kazakhstan and Eurasia, the numbers that you guys have seen over the last several quarters, is that continuing to ramp up or should we expect those numbers to be relatively flattish now?
No, I think flattish is probably a better place to target.
Okay. And then the production declines in the Philippines, what caused the natural gas declines over there?
It was a turnaround in the quarter.
Okay. So we should see
that back
up? Yes, you should expect to see that come up next quarter.
And last question on Gorgon. As you guys have led all your contracts or a lot of your contracts out for this project, how are you guys dealing with kind of I guess higher nickel prices? And because obviously I think in a modular design you tend to have higher material costs. So how are you guys dealing with that sort of situation? Gosh, I don't
have any unique information on the nickel cost impact on Gorgon. You're right, it is modular design. And we've got work in a number of fabricating yards all across the globe really here. I don't have anything specific to offer on that particular item.
Okay, great.
I appreciate the time. Okay. Thank you.
Our final question from Jacques Rousseau with RBC. Good morning.
Good morning.
Just wanted to ask another tax tax question coming at it from a little different way. Would you be able to provide the international upstream tax rate in the Q1 and then compare it to some other quarters and that may
necessarily we want to necessarily go into that kind of detail. I mean, the effective rates, I mean, they really can move quite substantially in the international sector from 1 quarter to the next quarter to the next quarter, and it's dependent literally upon the taxable income by country in those locations, any sort of tax changes that may have occurred, any sort of application of investment tax credits that are applicable. We also have differences just hard for us to give a go forward point for you there.
Well, not so much for a go forward point, but just to be able to compare historically as to what change represented year over year?
Okay. Well, year over year, for a full year cycle, I think 2,008, 2009 have been relatively stable in the 43%, 44% range. 4th quarter was high, higher than that. Q1 was substantially lower than that for us. So it bounces around, but for the year perhaps maybe thinking about it averaging out.
Okay. One other one. In terms of downstream, is there a kind of rule of thumb as to what percentage of the assets will be in the U. S. Downstream and how much will go into the international downstream?
Yes. I mean the chemical operations, right, are wholly owned Chevron Oronite and 50% joint venture with Chevron Phillips Chemical Company. That 50% shows up in the U. S. Segment, and the oronite has both U.
S. And non U. S. Components to it. Okay.
Thank you very much. I think that concludes our call for today. I want to thank all of you for your participation on the call. I especially want to thank the analysts who asked good questions on behalf of all the participants. So Sean, I'll turn it back over to you.
Thank you. Ladies and gentlemen, this concludes Chevron's Q1 2010 earnings conference call. You may now disconnect.