Good morning. My name is Michelle, and I will be your conference committee for today. Welcome to Chevron's conference call to discuss the announced acquisition of Anubarto. 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.
If anyone should require assistance during the conference As a reminder, this conference call is being recorded. I will now turn the conference call over to the Chairman and Chief Executive Officer of Chevron Corporation, Mr. Mike Lewis. Please go ahead.
Okay. Thanks, Michelle, and welcome and thanks for joining us this morning, everybody, on the call. I'm joined on the call this morning by Al Walker, Chairman and CEO of Anadarko. And also with us is our new CFO, Pierre Breber and Wayne Gordon, our General Manager of Investor Relations. Before we get started, please be reminded that this presentation estimates, projections and other forward looking statements.
Please review the cautionary statement and important information for investors and stockholders on Slide 2. Moving to Slide 3, I'm pleased to announce that Chevron has entered into a merger agreement with Anadarko. This is a compelling transaction that reinforces Chevron's commitment to win in any environment. I'd like to begin with 4 key messages about this deal. First, Anadarko's high quality assets further strengthen Chevron's advantaged portfolio and are a natural fit.
We know how to do permanent, deepwater and LNG. 2nd, this transaction is aligned with our priorities and reinforces our guidance shared last month. It further strengthens our low risk short cycle capital program, maintains a low cash breakeven and preserves a strong balance sheet. 3rd, this vehicle will enable additional portfolio high grading and cost reductions as we streamline the combined organization. We'll be leaner and more focused and asset sale proceeds will help reduce debt and return more cash to shareholders.
Of course, and most importantly, this deal adds value to Chevron shareholders. The expected capital and cost synergies make this deal accretive on all important per share metrics 1 year after closing. Moving to the next slide, I'd like to highlight some of the key transaction terms. Anadarko's shareholders will receive approximately 0.39 Chevron shares and $16.25 in cash per share of Anadarko to a $75.25 equity debt spike. The total consideration is $65 per share based on Chevron's closing price yesterday.
I believe this is a great deal for shareholders of both companies. Anadarko shareholders are receiving an attractive premium and will have continued investment in the business through ownership of Chevron Shares. We believe the time is right for this deal and we'll realize additional value as we deliver cost and capital synergies, accelerate development of Anadarko's great Permian acreage and further streamline our cost structure and high grade our portfolio. Turning to slide 5, the value of the deal is supported by Anadarko's large and attractive resource position and the cost and capital synergies created by this combination. Anadarko has done a great job in hydrating their portfolio to a high quality resource base with more than 10,000,000,000 barrels in strong conditions in unconventional basins, offshore and LNG.
And at less than $3 per barrel of resources, the price is attractive. We expect to deliver $1,000,000,000 in before tax cost reductions from both deal synergies and additional efficiencies in Chevron. We also expect to reduce capital expenditures by $1,000,000,000 per year through eliminating overlap, capturing efficiencies and high grading the portfolio. And we anticipate achieving the run rate on both capital and cost synergies within a year of closing, which is expected in the second half of this year. Because of our confidence in realizing these benefits, we will raise our share buyback rate to $5,000,000,000 per year upon closing.
The results, we expect this deal to be accretive to both earnings and free cash flow on a per share basis 1 year after close at a $60 Brent price. Bottom line, we're committed to delivering value from this deal to all shareholders. Moving to Slide 6, Our cost reductions are coming primarily from deal synergies, redundant activities and corporate functions in business units where operations overlap. In addition, our target includes further efficiencies from Chevron's operations. The combination of asset sales and integration of Anadarko make this the right time to further lean out our organization.
On the capital side, we intend to accelerate activity in Anadarko's Permian acreage. We can fully farm and develop this attractive high return acreage with our efficient well factory and basis of design, accelerating pad drilling, which Anadarko has just begun. We plan to more than offset the growth in Permian capital by eliminating overlap in corporate capital, rationalizing the exploration stones and further high grade it so that we fund only the very best growth economic projects. The net result is anticipated to be a $1,000,000,000 reduction of the combined capital spending of the 2 companies. We expect the combined company's production growth rate during the next 12 years to be consistent with our prior guidance, 3% to 4% per year, including reductions from asset sales already out in the public domain.
Turning to Slide 7, we remain committed to high grading our portfolio. We expect to achieve our current asset sale target by the end of this year, 1 year early, and we're establishing a new target of an additional $15,000,000,000 to $20,000,000,000 of asset sales between 2020 2022. This will further focus our portfolio on the strongest assets, will enable even more cost and overhead efficiencies, as I already mentioned, and rebalance the capital structure, reducing debt and increasing cash returns to shareholders. The financial benefit of these asset sales will be further accretive to our per share performance. Now turning to Slide 8.
The addition of Anadarko's high quality assets strengthens Chevron's advantaged portfolio. It makes us even better. As you can see from the map, Anadarko's assets are a great strategic fit with Chevron, particularly in the U. S. It's a focused, liquids weighted portfolio with a capital profile driven by short cycle spend with low cash breakevens.
Anadarko has talented employees who will strengthen our workforce. This portfolio fits our core strengths in shale and tight, deepwater and LNG. Chevron, through scale, operating know how and financial strength, will get the most out of Anadarko's world class assets. We're uniquely positioned to capture more value out of this combination. On Slide 9, you can clearly see how the addition of Anadarko makes our leading position in the Delaware Basin even stronger.
Combined acreage creates an unmatched position in the core of the core. It results in a 75 mile wide highly contiguous corridor where we can drill, develop, operate and build infrastructure, all with great efficiency. We plan to accelerate the development of Anadarko's acreage, increasing the number of rigs with pad drilling, long laterals and our latest phases of design. We'll also leverage Chevron's digital tools and suite of technologies to improve recovery, lower cost and increase efficiencies. These are highly attractive investments with strong economics.
Great rocks, liquids weighted and with a lower royalty plus closing as a result of Chevron's mineral ownership in part of Anadarko's acreage. Getting more out of the Permian sooner is an important value driver. If you liked Chairman's Permian position before, you'll like it even more now. Moving to Slide 10, another attractive position in Anadarko's portfolio are the shale and tight assets in the DJ Basin. This advantaged acreage is low royalty, extensively cored up and liquids rich.
The returns in Anadarko's DJ Basin operations have increased with lower costs, increased lateral lengths and higher EURs. We really like what they've done here and believe we can leverage our factory model and proprietary technologies to maintain and perhaps improve performance. Another area of alignment is the Gulf of Mexico, where our positions are highly complementary. Culp companies have been leaders in the deepwater Gulf of Mexico for years and this acquisition increases our operating platform count nearly threefold from 6 to 16. This deal brings together the 3rd and 4th largest producers in the Gulf.
This extensive infrastructure, combined with advances in subsea technology, is expected to further enable even more capital efficient tieback opportunities, driving strong cash margins and higher project returns. With greater scale and improving technology, we clearly need to get more out of the combined assets in the Gulf of Mexico. Moving to Slide 12, Anadarko has a number of other great assets. The Area 1 opportunity in Mozambique is particularly exciting with one of the largest discovered gas resources in the world. We believe the project team and plan of developments are well positioned for success.
With 9,500,000 tonnes per year of contracted LNG, this project is fast approaching FID, a timeline we fully support. Mozambique LNG is expected to lead to stable and long life cash flows and the timing of its first production fits nicely in Chevron's production outlook. We look forward to working with the host governance, community and commercial partners as the project advances. Western Midstream is a successful midstream company, a strong pipeline operator whose assets are well aligned with our upstream positions and are a key enabler as we further accelerate development in the Permian. Purchasing assets in Algeria and Ghana generate strong cash flow and provide a quality addition to our base business.
We look forward to building strong relationships with both partners and governments in each of those areas. Moving to the final slide, I want to return to the messages from our Investor Day a few weeks ago. Our story remains unchanged. We have an advantaged portfolio with strong cash flow, a strong balance sheet, low breakevens and a disciplined capital allocation strategy to deliver superior cash returns to shareholders. The guidance provided today, dollars 1,000,000,000 in annual cost savings, dollars 1,000,000,000 in annual capital reductions, dollars 15,000,000,000 to $20,000,000,000 in asset sales over 3 years, but additional $1,000,000,000 targeted annual share buybacks demonstrates our commitment to add value from this deal and enhance certain value proposition to shareholders.
I'm confident in our ability to execute this deal of excellence and quickly integrate Anadarko's operations in order to capture synergies and additional upside. Our company has done this in the past and we will do it again. Before we move to questions, I'd like to hand the call to Al Walker to make a few comments. Al? Thanks, Mike.
1st and foremost, we believe this is a compelling transaction for our investors. Chevron, already a great company in Anadarko with its people and world class assets, has won a powerful combination. Chevron's culture and capabilities are exceptional. I greatly respect Mike and committed to working with him to ensure a smooth and seamless transition for our people, our operations and our investors. I believe this will be a very powerful combination for many years to come.
Back to you, Mike. Thanks, Al. I want to thank everyone on the call for your interest in Chevron and welcome your questions. Michelle, please open the line for questions.
Thank Our first question comes from the line of Jason Gammel of Jefferies.
Please go ahead. Thanks for the questions on the transaction. I guess let me switch to the Permian Basin, really probably the biggest driver on the transaction. You've probably got pretty long growing inventory and with the low and no royalty ACAS position that you have, Can you talk about how this is value accretive from an NAV standpoint? Are there some synergies that can be achieved just in terms of how you develop the acreage?
Is it more about ramping up the pace of drilling? Anything else you could add there? And then just I'll have to follow-up by the way. I've asked you this before, how are you comfortable with the Permian becoming as a percentage of your overall portfolio? Yes.
Jason, Anadarko's acreage and ours are booked out in the Delaware Basin in particular. Their acreage is blocked up and really well set for large scale pad developments. We've seen continued improvement in pad scale developments, performance at all attributes, drilling, completions, recoveries, the efficiency of our infrastructure build outs. And so this gives us the ability in the core of the core, and I got to tell you this is really in the sweet spot, to have a very, very large and even more contiguous area for development. And so this will accelerate production.
It will accelerate royalty. And we think that the combination of land position, the continued strong royalty position and strong performance will just further deliver value in this high return, short cycle asset class. And so it's not about getting bigger in the Permian, it's about getting better in the Permian and we think this makes us even better in the Permian. Your second question is one that I think we'll be talking about over time. We've laid out our view on the Chevron portfolio alone being at 900,000 barrels in 2023.
And obviously, this will take that number up. I'd just remind you, this is short cycle. It's we're going to be cash flow positive next year. We're not changing that guidance. And it's the highest return investment dollar that we can spend.
And the technology and performance improvement unlocks more and more recovery in these assets over time. And so it's low risk below ground, it's lower risk above ground than about anywhere in the world and it's high return. And so having a great position in a low risk, high return basin that is short cycle is a really attractive thing. Understood. And I hear you'll still be free cash flow positive next year.
Thanks, Mike. Mike.
Your next question comes from the line of Alastair Syme from Citi. Your line is open.
Hi, everybody. Mike, just a follow-up question. As you look forward to the disposal programs, you talk around, I guess, future shape of the business, you're sort of focusing trying to focus on the tail of the assets, so you're thinking about that short, long cycle mix, how does the disposal score? Yes. So I don't want to get too specific on that because we don't want to talk about those until we actually have specific transactions to discuss.
But this gives us strength on strength. And in our business, scale matters, low cost matters. And this gives us positions with scale in unconventionals in further scale in deepwater Gulf of Mexico. I talked about Mozambique, which is going to be a world class LNG resource. And so these are positions that will have long lines, high cash generation and deliver strong returns at scale, and they'll be lower on the cost curve than the marginal projects and the marginal fields in the world.
So it really builds even greater strength into our portfolio. And there will be there's always a tail when you look at it. Even in a strong portfolio, some assets are stronger than others. And it doesn't mean they're bad assets. But as we stay disciplined in capital spending, there will be assets that others will value and be prepared to invest in that might be lower in our investment sheet.
And so those are the kinds of things that we'll look like and we'll look at. And over time, we'll update you as we have specific specific transactions to discuss. As a follow-up, can I talk a little bit about your sort of thought process in the timing of this year? I mean, you've been in the job for about a year. Is it just you're sitting back looking at the relative equity performance between yourselves and all the US E and Ps and saying, looking at that, I think there's an opportunity to hide areas here.
Is that the right one? Well, it's a resource acquisition business. And every year we produce about 1,000,000,000 barrels of oil equivalent. And so you're constantly adding resource through exploration, through technology and through transactions. And so we think the quality of these assets and the quality of the people and the opportunity set that Anadarko has assembled is exceptional.
We think it's highly complementary with our capabilities and our existing operating theaters where we have strong, proven experience and track record. We've got good supply chains for materials and services, always driving to be more efficient. And we think that when you're in a strong position, you're always looking to get stronger. And so this is a chance to move from strength to strength and really do things together even better than both companies were doing on their own.
Your next question comes from the line of Sam Ghislain from Wolfe Research. Your line is open.
My first question is about Mozambique. You pointed out in the prepared remarks that the project has advanced quite a bit commercially. And so you feel good enough about those terms to take it in today. But with Chevron there now, your portfolio is structured differently. Perhaps those terms might have been different if you were executing on that component the whole time.
Do you have any inclination to come in and try to execute some kind of change to those terms? Are you happy with the way Mozambique is structured commercially today? We're happy with the way it's structured commercially today, Sam. Anadarko has done a really nice job with this. And Al and his team, and it's a world class team, truly a world class team.
And we know some of their people and have known them for a long time. They've done a terrific job in bringing this project along and are making great progress. And they've got 9,500,000 tons of SPAs in place. And it's moving steadily towards FID, which we support. So, no, I'm not going to go back and try to revise history.
This is a great project that is moving towards execution and we're strongly supportive of it. Okay. Thanks so much for that. And then just on broader capital allocation, we have the buyback upsizing here. Contextually, am I on the right track if I think of this as pre this merger, your buyback was created under the framework that you did want to preserve some capital for resource acquisition as you point out.
And now even if the broader direction of free cash flow generation is not quite up into the right the way it is. Although this deal looks accretive, I'm not saying that it's not. But my point is that you can actually deploy more surplus capital sort of as a percentage of that surplus towards capital allocation because you've satisfied your resource acquisition kind of needs for the near term. Am I thinking about that, Yes. Let me try to respond.
And if I'm not hitting what you're asking, Sam, let me know. But our financial priorities haven't changed. The dividend is priority 1 and sustaining and growing that dividend is job 1. The second is to reinvest in the business. And that could be organic or inorganic reinvestments to ensure that good, strong cash flow generation capabilities well into the future.
The third is to maintain a strong balance sheet. And then the 4th is to return cash to shareholders through share repurchases. Prior to this announcement, we are doing all 4 of those. Following the close of this transaction, we will continue to be able to address all 4 of those priorities and in a strong enough position that we're operating the share buyback because the cash flow accretion on this is good. And the cash flow accretion is free asset sales.
And so as you look at the asset sale contributions, those make the free cash flow accretion even stronger. So we'll be able to satisfy our forward priorities, but they are unchanged. Yes. The only thing I'll add to Mike is he emphasized this free cash flow accretive, kind of, would go without asset sales even more so with asset sales. We are issuing some shares.
We wanted to keep the cash yield to shareholders at least as good or better. So we're upping the share buyback closing by 25% to reflect our confidence and the ability to achieve the synergies, achieve the accretion and reward our shareholders. Thanks so much. Thanks, Sam.
Your next question comes from the line of Biro Bhatia from RBC Capital Markets. Your line is open.
Hi, thanks for taking my questions. Thanks, Prahlad. Two questions, please. The first one was on maybe just a general thoughts on entering Mozambique, Mike. Given some of the execution issues in North trade in LNG and on the Greenfield projects, How do you think the Company is positioned to execute on a fairly large scale complex project such as most 100 LNG?
That would be the first question. And then secondly, in the Permian, the Guyana does have a decent set in the midstream business. Can you just talk about what the attractions of increased scale in the midstream or your to your family position going forward? Thank you. Yes.
So I'll start with Mozambique. You're right, our Australian LNG projects are ones that they're now producing and producing well. The execution was something that we could have done better at. And we've learned a lot of lessons from that. We've, through the diligence process, had a chance to look pretty closely at the kind of development, the contracting and execution planning that Al and his team have done and we're very impressed with it.
And in fact, our intent is to be sure that we preserve what we think is a strong team, a strong approach and follow through on what they've laid out. And the intent is not to come in here and make a lot of changes. We do have lessons that we learned in building these kinds of plants that we'll want to be sure that we share as appropriate when we reach a point where it is appropriate. But this is set up to be delivered at a very competitive cost and we like the we like what we've seen on all the engineering and development and execution planning. And we would intend to see it through on the path that it's on and only where we can add people with experience and perspective or maybe some advantage thoughts on certain goods that we might have master contracts for where we could help the project be even stronger.
But we think that it's well positioned for execution and we think that what we've learned is both a little humbling and also valuable as we're involved in other projects. The question on the funding had to do with the midstream. And for those that have followed us for a while, we've not established an MLP. We really didn't have the asset position to do so. And what we've done is sold off what I would describe as our merchants midstream assets into a pretty strong MLP market and helped others grow their midstream MLPs and realized good value for the assets we sold because we didn't have the footprints or the really the kind of strategic imperative to do that.
That said, Western is a good midstream company and it's vital to both the Permian Basin and the Digiva Basin. And as we've seen whether you're talking about oil last year or gas right now, access to high quality offtake in midstream infrastructure is very important to realizing value out of these unconventional basins. And so, we like the midstream position and we think it's very strategic relative to a stronger Permian and then a new position in the DJ. And we're looking forward to learning more about that business as this progresses. Okay, Michelle, we're ready for the next question.
Your next question comes from the line of Rob Reggett from Bank of America Merrill Lynch. Your line is open.
Good morning. Congratulations, guys. For older guys like me, I guess, I would say what's taking so long. Congratulations. Couple of quick questions if I may.
Mike, the follow-up I guess to the last question was Anadarko's interest in WES. Is it not quarter long quarter in the U. S. And buying business? Well, I just tried to answer it.
We see it as strategic and important for the ongoing development of both of those positions. And so, yes, we like those and we think that we're trying to create access to markets and it's a little bit of a different strategy than we have been pursuing because Anadarko had a different asset position and he's done a nice job in bettering that. So yes, it's strategic. I guess I don't want to take the progress as a part of you for your question, but what I expect positioning was and I don't know if I want to comment on this is that the market has failed for many, many years to recognize the ownership of the public equity value in WES. And I think there was sort of a frustration for both investors and perhaps your management to the point where you thought it was assuming maybe you spoke down a little bit to help with the more funding.
So Yes. I'm just going to say from our standpoint, I'm not going speculate on that at this point in time, Doug. And I'll let Al comment maybe on the historical context that you're referring to. Thanks, Mike. Doug, I understand the question.
I think from our perspective, we were never committed to selling down. We were never committed to not selling down. We always issued a business extremely good holding. We and I talked about that credit debt. I think in the context of how Mike is looking at it, given that the company combined is so much bigger than Anadarko standalone, how Mike thinks about wanting to do this in the future is likely very different than what you historically believe Anadarko might or might not do.
Okay. So my next question is just a compliment. Can you offer any kind of color or context, which is obviously, you know the lack is compelling, but we just want to make sure that we're seeing that to the Central Bank? Yes. I mean, there's a that's a standard element of a merger agreement.
When the agreement filed and published, you'll see the details on that. Okay. But I think the discovery is material. Is that what culture would be If I use that word, I'd be really it's a standard. I mean, I think it's in the range of what you would expect to normally see in a deal like this.
Okay. Appreciate you taking my questions, Chris. Thanks for your help. We'll miss you all.
Your next question comes from the line of Jason Gabelman from Cowen.
Hi, guys. Congrats on the deal. I'd like to personally ask a question about the DJ Basin. I believe it's Anadarko's largest producing asset and there's obviously some regulatory headwinds there. Unclear what the permit outlook is for Anadarko's drilling positions post this year.
Just wondering, Mike, how you view that asset and that asset's growth and potential concerns around that asset within the wider portfolio? Yes. No, we think it's a very good asset. As I mentioned, it's highly contiguous. They've got Alan has seen it very efficient in developing it.
And we look forward to partnering with government officials and communities in Colorado to continue responsible, efficient and safe development of that. I recognize the kind of political and regulatory dynamic that has been underway there. And we would engage in an appropriate time with all the appropriate parties to be sure that we understand their expectations and that we operate responsibly, which is what Anadarko has done and we plan to continue to do so. We like the asset. Okay.
Thanks for that. And then can you just go into some more detail about the potential tieback opportunities in the Gulf of Mexico? It looks like on that map, there's quite a bit of potential. Are there anything specific that you could call out in the near term that you think will be immediately competitive with kind of the other assets that you're spending money on right now? And what does that do in terms of paving for the longer cycle projects that you've previously called out like Anchor and Well?
Thanks. Yes. So, deepwater asset class and specifically the Gulf of is very important to Chevron. We've got great positions as you put these trends together in Grand Canyon. As you put 2 large producers together and the extensive infrastructure that we see there, it creates terrific opportunities.
The Gulf of Mexico delivered strong cash margins. And along with advances in club seat technology that will enable longer tiebacks, This creates more reach for us and more scale to get more into these assets. I think we'll update you in time with more specifics around tieback plans. And we have some very nice discoveries out there. You mentioned Tigris, Whale, we've also got Ballymore that all are very attractive and are being advanced right now through the development process.
So we'll see, I think, very, very efficient and high return projects and also likely some ratable greenfield developments where they're diversifiable and we can get the costs and the economic inflation right.
Your next question comes from the line of Harry Maguire from Barclays. Please ask your question.
Hi, good morning. My first question, maybe I'll just flip the Western Midstream questions around a few years earlier. But historically, there were a number of benefits to having an embedded midstream company, Some are operational, which I think you spoke to in terms of how strategic it is to the Permian and the DJ, but some are also financial. And the financial benefits in recent years have been more than 70 basis for complementary companies, just given a higher cost of capital. So my question is, how do you think about the value of pursuing midstream development in terms of last balance sheet as opposed to just doing it at obviously a much lower cost of capital entity like Chevron?
Yes. I'll let Pierre speak to that. Yes. Look, I mean, Mike addressed that it fits well with the upstream positions. And you're absolutely right with different credits.
I mean, we're committed to having a strong balance sheet with double leg credit that changes how you look at financing through the MLP and the Midstream Company. But it comes with a lot of capability. It comes with a lot of connection to our business. And as Mike said, it's a business that we didn't we did not pursue and we didn't have the assets to pursue Anadarko. It's a nice job to build up that business and to have an attractive value proposition we intend to work with it and manage it going forward for the benefit of their shareholders and ours.
And then next question, can you talk a little bit about how you expect that of Anadarko, of course, closing? I believe the Chevron going well back eventually guaranteed the debt of unit house. I'm just wondering whether you plan to formally guarantee it or any color you could provide there would be helpful. Well, we're going to assume the debt, right? It's a share deal.
And so the debt will come with the transaction. That's why the enterprise value is what you saw in the press release. We're committed to maintaining a strong balance sheet. We're not we don't have a hard target on the debt ratio as an outcome of a number of factors, but in a range of 20% to 25% for Chevron post transaction, which will include the same debt is a good range. We'll start a little bit outside of the range.
So with the free cash flow accretion without asset sales, when you add on the asset sales, we'll be generating excess cash, which will allow us to get back into that range and increase our buybacks, as we've said. Okay. Thank you.
Your last question comes from the line of Bijit Heikkinen from Heikkinen Energy. Please ask your question.
Good morning, guys, and look forward to getting to know Chevron better.
As I was thinking about
the overlapping assets in Bend and Mozambique, how do you think about the capitalization of G and A savings and just the lower cost of capital for these major projects versus what kind of our base assets to capital was in projects? Yes. Look, this is Pierre again. That's part of the rationale of the transaction. And I think Al said it also.
We're a natural owner for these assets, in particular, elongated assets, which tend to go to a standard credit like we are. But really, our portfolio is a lower risk portfolio overall. The majority of the capital, as Mike has said, is in more flexible, more ratable projects. So it is a big scale position. As we talked about before, and as Mike said, the scale gain is a scale gain.
So our capital, the strength, I think, across all asset classes and enables us to do some things together that we can do individually. Congratulations on taking out and thanks for taking my question. Okay. Thanks very much. And I am told that is the last question that is in the queue.
So we wound up a little earlier than we thought. I will thank everybody for dialing in and appreciate your interest in both of our companies. And Al and I are committed to a smooth integration and continued value creation for all shareholders. So have a good weekend and we'll talk to you all soon.
Ladies and gentlemen, this concludes today's conference call. You may now disconnect.