Please stand by. We're about to begin. Good day, everyone, and welcome to the Exxon Mobil Corporation first quarter 2016 earnings conference call. Today's call is being recorded. At this time, I would like to turn the call over to Vice President of Investor Relations and Secretary, Mr. Jeff Woodbury. Please go ahead, sir.
Thank you. Ladies and gentlemen, good morning, and welcome to ExxonMobil's first quarter earnings call. My comments this morning will refer to the slides that are available through the Investors section of our website. Before we go further, I'd like to draw your attention to our cautionary statement shown on slide two. Turning now to slide three. Let me begin by summarizing the key headlines for first quarter performance. ExxonMobil earned $1.8 billion in a difficult business environment marked by low commodity prices. Cash flow from operations and asset sales totaled $5 billion in the quarter. These results demonstrate the durability of our integrated business, enhanced by our relentless focus on managing those factors that we can control, including effective cost management, reliable performance, and operational integrity.
A highlight this quarter is our strong chemical results, which underscore significant gas and liquids cracking advantages at our integrated sites and differentiated capabilities across the value chain. The corporation also continues to make steady progress on its investment plans. During the quarter, we benefited from recent capacity additions while reducing CapEx 33% versus the prior year quarter. We continue to effectively manage our spending while selectively investing in the business to meet long-term energy demand and importantly, grow shareholder value. Moving now to slide four, we'll provide an overview of some of the external factors affecting our results. Global economic growth remained weak during the first quarter. In the U.S., estimates indicate growth has slowed further since late 2015. In China, growth continued to decelerate. Economies in Japan and Europe showed some modest improvement compared to the fourth quarter.
Crude oil prices were quite volatile and decreased relative to last quarter, while natural gas prices continued to fall. Global refining margins weakened on lower distillate demand and continued surplus inventory. Chemical commodity and specialty margins strengthened on lower feed and energy costs. Turning now to the financial results as shown on slide five. As indicated, ExxonMobil's first quarter earnings were $1.8 billion, or $0.43 per share. Corporation distributed $3.1 billion in dividends to our shareholders. CapEx was just over $5 billion, down $2.6 billion from the first quarter of 2015, reflecting continued steady progress on our investment plans. Cash flow from operations and asset sales was $5 billion, and at the end of the quarter, cash totaled $4.8 billion and debt was $43.1 billion. Next slide provides additional detail on sources and uses of cash. Over the quarter, cash balances increased from $3.7 billion-$4.8 billion.
Earnings adjusted for depreciation expense, changes in working capital and other items, and our ongoing asset management program yielded $5 billion of cash flow from operations and asset sales. Uses of cash included shareholder distributions of $3.1 billion and net investments in the business of $4.5 billion. Debt and other financing increased cash by $3.7 billion, which included the impact of anti-dilutive share purchases. ExxonMobil will continue to limit share purchases to amounts needed to offset dilution related to our benefits plan and programs, but does not currently plan on making additional purchases to reduce shares outstanding. Earlier this week, the board of directors declared a second quarter cash dividend of $0.75 per share, a 2.7% increase from last quarter, marking our 34th consecutive year of per-share dividend growth. Moving on to slide seven for a review of our segmented results.
ExxonMobil's first quarter earnings decreased $3.1 billion from a year ago quarter. Lower upstream and downstream earnings were partially offset by stronger chemical results and lower corporate costs. Our corporate effective tax rate was 19% during the quarter, down from 33% a year ago, reflecting changes in our segment earnings mix and one-time favorable tax effects reported in the corporate and financing segment. On average, corporate and financing expenses are anticipated to be $500 million to $700 million per quarter over the next few years. In a sequential quarter comparison shown on slide eight, earnings decreased by $970 million as stronger chemical results partly offset lower upstream and downstream earnings. Turning now to the upstream Financial and Operating results starting on slide nine. Upstream earnings decreased $2.9 billion from a year ago quarter, resulting in a segment loss of $76 million. Sharply lower realizations decreased earnings by $2.6 billion.
Crude prices declined by almost $18 per barrel, and gas realizations fell more than $2.25 per thousand cubic feet. Unfavorable sales mix effects reduced earnings $100 million. All other items decreased earnings another $250 million, where lower gains on asset sales and less favorable tax effects were partly offset by reduced operating expenses. Moving to slide 10. Oil equivalent production increased 77,000 barrels per day or 1.8% to more than 4.3 million barrels per day compared to the first quarter of last year. Liquids production was up 260,000 barrels per day or 11.5%, driven by capacity additions from recent project startups and continued good facility reliability across the portfolio. However, natural gas production decreased 1.1 billion cubic feet per day or 9.3%. Growth from major projects was more than offset by regulatory restrictions in the Netherlands, field decline, divestment impacts, and lower entitlement volumes.
Turning now to the sequential comparison starting on slide 11. Upstream earnings were $933 million lower than the fourth quarter. Realizations decreased earnings by $1.2 billion, where crude declined more than $8 per barrel and gas fell almost $0.75 per thousand cubic feet. Favorable volume and sales mix effects improved earnings by $170 million, including contributions from new projects and higher natural gas demand. All other items added $140 million, reflecting lower operating expenses, partly offset by lower favorable tax effects. Moving to slide 12. Sequentially, volumes were also up 77,000 oil equivalent barrels per day or 1.8%. Liquids production increased almost 60,000 barrels per day, up 2.3% from ramp-up of new project volumes. Natural gas production was up 120 million cubic feet per day, reflecting stronger seasonal demand in Europe, partly offset by regulatory restrictions in the Netherlands and lower entitlements.
Moving now to the downstream results starting on slide 13. Downstream earnings for the quarter were $906 million, a decrease of $760 million compared to the first quarter of 2015. Weaker refining margins reduced earnings by $860 million, partly offset by $100 million of all other items, primarily favorable foreign exchange effects. Turning to slide 14. Sequentially, downstream earnings decreased $445 million as weaker margins reduced earnings by $470 million. Unfavorable volume and mix effects, mainly from increased European maintenance activities, decreased earnings by another $150 million. All other items provided a partial offset, adding $170 million, mostly from lower expenses. Moving now to chemical results starting on slide 15. First quarter earnings were $1.4 billion, up $370 million versus the prior year quarter. Stronger commodity margins from liquids cracking in Europe and Asia increased earnings by $250 million.
Higher global sales volumes contributed $80 million while all other items added another $40 million again from lower expenses. Moving to slide 16. Sequentially, chemical earnings increased $390 million due to stronger commodity and specialty margins. Unfavorable volume and mix effects were more than offset by lower expenses. Turning now to slide 17. As you may be aware, Standard & Poor's reduced its credit rating on ExxonMobil by one notch to AA+ with a stable outlook. Earlier this month, Moody's reaffirmed its Aaa credit rating on the corporation with a negative outlook. We want to be clear that nothing has changed with respect to the corporation's conservative financial philosophy or prudent management of its balance sheet. Our ability to access financial markets on attractive terms remains strong. ExxonMobil's financial strength remains a significant competitive advantage and enables us to create long-term shareholder value despite near-term market volatility.
ExxonMobil has a long history of prudently managing our capital structure and financial capacity through numerous commodity cycles. We fully expect to manage through this one under those same prudent financial principles. Moving now to slide 18 and an update on Upstream projects and the exploration program. Four major project startups year-to-date added 170,000 oil-equivalent barrels per day of working interest production capacity. In January, the Heidelberg project in the Gulf of Mexico started up several months ahead of schedule and under budget. Heidelberg is a five-well subsea development in 5,300 feet of water tied back to a central truss spar production facility with a peak capacity of 80,000 barrels of liquids and 80 million cubic feet of gas per day. In Australia, train one of the Gorgon LNG project started up in March.
As you know, LNG production has been suspended due to mechanical issues, which the operator is actively working to resolve. In April, ExxonMobil started up two more projects ahead of schedule and under budget. Julia in the Gulf of Mexico and the Point Thompson initial production system on Alaska's North Slope. Julia is a capital-efficient subsea tieback to an existing production facility. Another example of ExxonMobil's capability to cost-effectively develop new deepwater resources by leveraging existing infrastructure. Production will continue to ramp up in the coming months as two additional wells are completed. At the Point Thompson project, two injection wells will work in tandem with a production well, cycling up to 200 million cubic feet of gas per day through an on-site central processing facility to extract about 10,000 barrels per day of condensate.
Notably, the project provides a foundation for future gas development on the North Slope and further demonstrates ExxonMobil's ability to safely and responsibly execute complex projects in challenging and remote environments. Two additional major projects are expected to come online later this year, namely Kashagan and Barzan, closing out the six major project startups planned for 2016. Turning now to our exploration program, where we continue to pursue and evaluate high-value resource opportunities. Offshore Guyana, we completed the largest proprietary 3D seismic survey in our company's history, and we are currently drilling the Liza-2 appraisal well. Data from the appraisal well and the 3D seismic will be used to evaluate the block's potential and development concepts. We plan to drill additional exploration wells with the existing rig. Offshore Uruguay, we are participating in the Aran-1 exploration well in Block 14, where we have a 35% interest.
In the Gulf of Mexico, we were the apparent high bidder on five new exploration blocks in Lease Sale 241. Final award of these blocks is expected later this year, and we will further strengthen our 1.1 million net acre position offshore. Plan to utilize proprietary seismic imaging technology and continue to build a portfolio of attractive future drilling opportunities. In conclusion, ExxonMobil remains focused on creating value through the cycle. We are advancing self-help initiatives, driving down costs, increasing efficiency, improving reliability, and capturing incremental margin across the integrated portfolio. First quarter, the corporation earned $1.8 billion in a difficult business climate, benefiting from structural advantages in our Downstream and Chemical operations. Integrated business generated $5 billion in cash flow from operations and asset sales.
We continue to successfully progress our investment plans, increasing Upstream production volumes to 4.3 million oil equivalent barrels per day while reducing CapEx and upholding our reputation as a reliable operator. ExxonMobil paid $3.1 billion in dividends during the quarter, sharing the corporation's success directly with our shareholders, and we remain steadfast in our commitment to pay a reliable and growing dividend. That concludes my prepared remarks, and I would now be happy to take your questions.
Thank you, Mr. Woodbury. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit one on your touch tone telephone. We request that you limit your questions to one initial with one follow-up so that we may take as many questions as possible. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Additionally, please lift your handset before asking your question. We will proceed in the order that you signal us, and we'll take as many questions as time permits. Once again, please press *1 on your touchtone telephone to ask a question. Our first question comes from Doug Terreson from Evercore ISI.
Good morning, Jeff.
Good morning, Doug.
In the downstream, volume for both gasoline and distillate seem to be weaker than the industry markers during the quarter and also over the past year. My question's twofold. One, how much of the weakness can be attributed to items such as divestitures, unscheduled downtime, weather, et cetera? Meaning, what is the real apples-to-apples comparison for the company? Two, with these results, I wanted to see if you had a little bit more color or maybe a more specific read-through into the key economies around the world. Meaning, you touched on it at the outset, but just wanted to see if you had a little bit more specifics in that area.
I think on the first item, I'd tell you just stepping back a little bit on the downstream, our fuel margins were weaker with distillate margins being at five-year lows due to, as you're much aware, global surplus capacity and high commercial inventories. Obviously, that was aggravated by a warm winter and a low heating oil demand. Particularly in the U.S., less demand in the energy sector. Although gasoline margins remain strong and demand is growing above capacity growth. We saw, as I said in my prepared comments, that from a volume perspective, we had increased maintenance activity predominantly in Europe in the first quarter of this year. If you compare it sequentially first quarter to fourth quarter, we had a much higher load on planned maintenance.
Okay.
I will say broadly speaking, Doug, in 2016, our overall planned maintenance will be lower than 2015, though we will have a fairly heavy first half.
Maybe a little bit more specific read-through into the global economy. These numbers were weak. I think you highlighted that, do you have anything else to add to your comments earlier?
No. I think I would step back more so from a macro on supply and demand. If you look at the last decade, overall demand has increased about 1 million barrels a day, maybe a little less than that. If you look at demand growth here in last 2 years plus this year, 2014, 2015, and into 2016 as to what we expect, we're seeing demand growth in excess of the 10-year demand growth. I think it's a good indication of pretty healthy demand increase, very consistent with our outlook for energy with oil growing about 0.6% per year and gas growing about 1.6% per year.
Okay. Second, Jeff, return on capital and valuation have declined versus the previous cycle for most energy companies, I think that prompted one of your competitors to indicate that returns, even at the expense of growth, would probably be their new path forward. While Rex made pretty clear that returns were still important for ExxonMobil, my question is whether there's been any specific movement towards maybe changing the future balance between spending and shareholder distributions, or do you guys think that as pre-productive capital normalizes, that the situation will resolve by itself? How do you guys think about that?
Yeah. From a macro perspective, as you know, we're constructive on oil and gas demand. We have maintained a very disciplined capital allocation approach with a longer-term horizon. That hasn't changed. We've been through these down cycles before. We've built this business to be very durable in a low-price environment, and we've maintained the financial flexibility throughout in order to continue to take advantage of opportunities, whether we're in the top of the cycle or at the bottom. The return on capital employed continues to be a very strong focus for us. You've heard us talk in the past, Doug, about a strategic decision years back to go ahead and invest in a number of major upstream projects concurrently in order to capture a very unique value that probably no one else could capture like ExxonMobil.
That had a burden on the return on capital employed for a period of time. Rest assured, all those investments are being tested across our average financial performance to ensure that we are adding accretive value, and we still view the return on capital employed as a key metric in the end as to how effective our value choices are.
Okay, great, Jeff. Thanks.
Okay.
Our next question comes from Evan Calio from Morgan Stanley.
Hi. Good morning, Jeff.
Morning, Evan.
Okay. My first question is on unconventionals. You're running close to 96 rigs at the peak of the last cycle down to 16 today, four in the Bakken, the Permian, given the environment. I know you presented a significant potential growth for Exxon, but I just want to understand how you, somewhat related to Terreson's question, how are you thinking about increasing activity in a recovery? You have a lot of options, a rigorous process. Is it an oil price? Is it excess cash flow target or even a fundamental outlook in supply-demand that will drive your swing in this shorter cycle resource, in a recovery, that is?
Yeah. Well, let me ask you think about it this way, Evan. For ExxonMobil, it really starts at the macro level with our view of supply and demand. As I explained to Doug a moment ago, we've been very constructive of long-term energy demand. For our long cycle investments, it's really a function of project maturity that actually maximizes value best keeping in mind our prudent financial management to ensure that we're meeting our commitments and maintaining financial flexibility. Now, for the shorter cycle investments that you're really asking about.
it is the same, with a much narrower focus on the near-term business climate. It's not really a price trigger for us. It's really a combination of all the relevant factors to ensure that we're maintaining our very prudent financial management, at the same time ensure that we have financial flexibility to continue to invest when opportunities come along. As you know, we're spending $23 billion this year, which represents a lot of investment activity.
I know there's a great consistency to your approach through the cycles and through time, do you see the allocation changing in any way favoring a shorter cycle resource versus more conventional allocation given some of the changes that could be evident through the cycle, a few forward cycles? I'll leave it at that. Thanks.
I think, Evan, it's a good question and probably worthy of a more deeper discussion sometime. I tell you that the mix of short cycle and longer cycle has changed over time, obviously, as our inventory base grew in the lower 48 unconventional. Our fundamentals of how we manage the business hasn't changed at all, the choices that we're making are really driven by how do we maximize shareholder value? All of these investments compete, as we've said previously, we are not opportunity constrained. We've got a very, very deep inventory across the portfolio, not only in the upstream, but also in our downstream and chemical business. It's just making sure that when we progress a project, an investment decision, that we have identified the optimized value proposition for it, and it's competing for that capital across the portfolio.
I wouldn't tell you that we ever set targets around segmenting the total investment program between long cycle and short cycle. It's just the factors I talked about a moment ago, making sure that the investments have matured, that we believe we've maximized value, that we maintain prudent financial management ensure that we can meet all of our commitments and retain our financial flexibility. We've got a very deep and diverse inventory of investment opportunities.
Okay. Thank you.
Thanks, Evan.
Our next question will come from Brad Heffern from Royal Bank of Canada Capital Markets.
Morning, Jeff.
Morning, Brad.
I was wondering if you could put a finer point on the chemicals performance during the quarter. It seemed like it was a little bit stronger than maybe the macro environment would have suggested. I think you cited cost savings or operating cost savings in your prepared remarks, is there any more detail you can provide around it?
Well, let's step back again here for a moment. We are also very constructive on chemical demand growth, growing about 1.5% above GDP. That really sets up the investment proposition going forward. If you look across the segment, commodities have been growing pretty strong, very tight, particularly in Europe and Asia. Demand growth has been growing much quicker. It really sets up a really good investment proposition into the future. The margin benefit is primarily feed and energy dropping quicker than product realizations. I'd also say, though, that our gas crackers continue to be advantaged. Even though the liquid crackers margins have improved, the gas crackers here in North America continue to have a very advantaged feedstock slate that allows us to compete very strongly in the demand market globally.
Okay. Thanks for that. Looking at CapEx, I think the number for the quarter is pretty well below in terms of a run rate basis the 2016 CapEx guidance. I'm curious if you're expecting seasonality in that number or if there's a reason to expect that that's going to increase meaningfully going forward or if you're actually truly below the CapEx on a run rate basis.
Brad. Just to set the stage, as you all remember, our CapEx for 2016 is down 25%, set at about $23 billion. The organization has not taken their foot off the pedal. They continue to work towards identifying capital efficiency opportunities. We're still capturing market savings, importantly, and I'll emphasize this, is that we're delivering our major projects on schedule and on budget, in many cases ahead of schedule and below budget. All of that is translating into capital savings that you're seeing in the first quarter of this year. We're not going to change our capital guidance at this point, I'll tell you that we're making great progress. I'll just say for a moment that the organization has really responded to the low price environment in a very effective way.
They keep very focused throughout the cycle, particularly in the bottom of the cycle, have really risen to the occasion and continue to identify substantial opportunities for the corporation to save both cash and OpEx.
Thanks, Jeff.
All right.
Our next question will come from Doug Leggate from Bank of America Merrill Lynch.
Thanks. Good morning, everyone. Good morning, Jeff.
Good morning, Doug.
I also have a couple of questions, if I may. My first one is really about somewhat specific on the oil sands business. It's been a fairly large part of the project growth and the shift towards liquids and so on. Obviously, in this environment, I have to imagine it's a substantial drag on your cash margins. I'm just wondering if you could, to the extent you can, just give us some idea what the economics of Kearl and your oil sands business generally, Cold Lake and so on, looks like in this environment. What I'm really thinking about is the kind of free cash torque that could generate in a recovery scenario. I've got a follow-up, please.
Well, generally speaking, the oil sands certainly no doubt profitability is compressed in this price environment. The organization once again keeps very focused on the fundamentals, particularly our cost and reliability, and they're making really good progress. They're finding structural enhancements that create margin at the bottom line. If you think about the resource base that we've got in oil sands, we've been working the oil sands now for over three decades, including technology development. On the mining side, I think Kearl is a great example where we applied proprietary technology that was able to reduce our capital investment, our operating costs, and improve our environmental footprint that will increase long-term value. The same is true for the in-situ operations. We've been optimizing our cyclic steam operations at Cold Lake for a long time.
We're identifying additional technology benefits like solvent-assisted, steam-assisted gravity drainage technology that'll improve, once again, the recovery and lower our cost and improve our environmental footprint. I think it's a testament to how ExxonMobil manages its portfolio. We work the project management and execution very well, and then when it starts up, they just keep on working on that cost structure and create margin because we know we can't count on price. What we got to count on is the things that we control, that being cost and reliability and our integrity of the operations. The last point I'd make is, remember, we also get value across the full value chain because our upstream is fully integrated with our downstream and chemical business.
Jeff, my follow-up, I'm going to have a stab at this one. It might be a very short answer, on Guyana. I'll kind of frame my question like this. My understanding is that the appraisal well is something of a 2-stage effort, stage 1 being pre, before the drill stem test. I'm just curious to the extent you can share with us whether that well has achieved its objectives and the additional plans perhaps to bring a second rig in and any comments around the additional prospects that are identified at this point. I realize it's early, just looking for any update you can share on whether that well achieved its objective.
Doug, I understand the interest that you and others have about Guyana. We were certainly very encouraged by the discovery well. The organization moved quickly to get a drill ship contracted and get it on site to appraise the Liza discovery. The well spud in February. We do plan to drill multiple wells this year. Liza-2 is progressing according to expectations. We will plan to test the well, and we should complete that activity mid-year. As I said in my prepared comments, we did complete the 3D seismic survey on the Stabroek Block. We began a survey on the Kaieteur Block, which we picked up to the east of the Stabroek Block. The well and seismic data is being assessed real time in order to provide insights into the discovery and the ultimate block potential.
We do plan on moving the rig from the Liza appraisal well over to a new prospect to the northwest after it is done at Liza.
All right. Jeff, I appreciate the answer. Thank you.
You're welcome.
Our next question comes from Sam Margolin from Cowen and Company.
Good morning.
Good morning, Sam.
There's actually quite a bit of enthusiasm developing for NGLs in the U.S. right now among the investor community. I was wondering if you could offer an outlook on how that might impact Exxon going forward in the context of your sort of overall gas outlook and you could even get more esoteric if you want regarding heat content and all the benefits that you might see in your unconventional gas business, given the fact that U.S. upstream earnings have been dragging a little bit here for the past few quarters.
Yeah. Well, it's a good question because it really highlights once again the benefits of the integrated business that we've got from the very large resource inventory and unconventionals in the U.S. all the way through to our chemical business. What's important is that we have built the chemical business to have a very wide flexible range of feedstock capability, including ethane, propane, butane all the way to gas oil. We've got significant flexibility within the chemical business to modify the feedstock in order to maximize margins. I'd say the same is true for Europe and Asia, particularly in Asia Pacific, in our Singapore cracker, that we have an unprecedented range of feedstocks, including the ability to crack crude oil, which is an industry first.
Okay, thanks. That's very helpful. Secondly, on M&A, I think Mr. Tillerson was pretty clear at the Analyst Day that the organization is not interested in kind of taking on encumbered assets. ExxonMobil has pretty good currency here. I was wondering, just in the context of whatever S&P's reasoning was in the revision, if there's an opportunity to maybe equitize through M&A or asset additions, or if that's even a factor considering that Moody's still has the stable rating.
Yeah. Sam, I tell you that nothing has really changed on how we manage our portfolio. Asset management includes the potential for accretive assets through acquisitions. As we've talked previously, as you heard from Rex, that we keep very alert to where there are potential value propositions to high-grade our existing portfolio. We're only going to pursue those acquisitions that we think have strategic value and are going to be accretive to our long-term returns. It's got to compete with the existing inventory investment opportunities that we've got. We got to be patient. We want to make sure that we keep a very wide aperture on what the opportunities look like. I think we've got a good handle on where there are opportunities, we need to make sure that it is value accretive to the business.
Once we are able to lock in on an opportunity like that, you'll hear about it.
Thanks so much. Have a good one.
Thank you.
Our next question comes from Phil Gresh from JPMorgan.
Hey, Jeff. Good morning.
Good morning, Phil.
First question on the quarter, you mentioned some color on the tax rate. It sounds like you separated it into two pieces. One was mix, and the other was some one-time effects in the corporate and financing segment. It sounds like the corporate and financing piece you expect to kind of revert to the $500 million-$700 million a quarter. I was just curious maybe on the mix side, kind of what drove that, and if you think about the full-year tax rate, would you expect that to still be similar to last year at current oil price levels?
Yeah. On the mix side, I tell you, it always has to do with the relative contribution between U.S., international, between upstream, downstream, or our chemical businesses. You can just sense from my comments that there's a lot of complexity in that. In terms of what to expect going forward, what I'd say is if we were talking about 2015 commodity prices, our guidance would stay at an effective tax rate of between 35%-40%. If we're in a lower commodity price environment like we saw in the first quarter, we're probably looking at something less than 30%.
Okay. That's helpful. Second question is just maybe a follow-up on the balance sheet. Looking at it slightly differently, your absolute debt levels are now around $43 billion. Just kind of wondering how you feel about that comfort-wise as you look through the cycle in a better environment with more cash flow. Is debt paydown on an absolute basis in any way a priority, or would you be thinking about other uses of cash?
Well, obviously, one of the considerations when we think about our capital allocation is retirement of debt. We'll keep mindful, but remember, we've got a very strong balance sheet. We will look at the relative decisions around investments in the business, the pace of investments, our commitment to our reliable and growing dividend, and then appropriately consideration on long-term debt levels. It's all about maintaining prudent cash management, maintaining our financial flexibility. We'll continue to be disciplined in our investment approach. We're not going to forgo attractive opportunities. We'll continue to assess our cash and our funding operations options around a range of options and take a very balanced approach on how we go forward in our capital deployment.
If I could just clarify, would debt pay down be a priority over buybacks?
Yeah. That's a decision that would be taken by the board that will be a function of a lot of factors, Phil. I wouldn't leave you with any impression that there's any prioritization that I'm conveying.
Yeah. Okay. All right. Thanks.
All right. Thanks, Phil.
Our next question comes from Paul Cheng from Barclays.
Hey, guys. Good morning.
Morning, Paul.
Jeff, I have two questions. The first one may be a need a bit more detail, and if it is, just let me know. If we're looking at the economics, have you talked to your downstream people then? Whether way now is economic that to blend naphtha into the U.S. gasoline pool or that you're better off to ship naphtha into your cracker for the petrochemical in Europe or Asia?
Paul, are you asking about bringing naphtha-
From U.S.?
Importing it into the U.S.?
No. Exporting from U.S. either because in order to show oil, we still have excess naphtha in this country. The question that I have is that, have you discussed it with your refining and chemical colleague that whether it's more economic for them to take the nine naphtha and directly brand it into the gasoline pool in the U.S., or that they export it into the overseas, such as in your European or in your Asia petrochemical guy to use it as a feedstock there?
We maintain tremendous flexibility on our feedstock options. That's a real-time optimization that we're managing. We'll optimize those feeds based on the best available returns. That's including moving feeds between continents.
Just curious that, do you have any kind of insight that you can share at this point that how's the economics, the shift? Is it more in favor of blending into the gasoline pool in this country, or that it's exporting?
Paul, I really don't have anything else to share on it other than say that it's a dynamic issue that we continue to optimize. I'd say that we are very well positioned to ensure that we're making the best value choices with respect to our feedstock slate.
The second question is that for the Point Thomson you mentioned in your prepared remark that it also give you a platform or a demonstration for potentially in the future
Yeah
Alaska LNG project. Let's assume that if the Alaska LNG project won't go ahead and it's really not economic at all, is the Point Thomson is still a good investment in here by yourself without that purpose?
Yeah, I would tell you, Paul, that we look at these decisions on a long term. Given the constructive view of what we think gas is going to do over time, we are confident that the Alaska gas will be commercialized. As to how that actually happens may vary from what we're currently considering. We have been very active with our partners in the state to identify the highest value opportunity in order to commercialize that gas, and it's going to compete on a global perspective. What's going to be really critical is getting transparent, predictable, and stable fiscal structure in place in order to make sure that it underpins such a significant investment.
All right. Thank you.
Thank you, Paul.
Our next question comes from Blake Fernandez from Howard Weil.
Jeff, good morning. I was hoping you could share a little bit about the rationale of the dividend increase. I know during your Analyst Day, you provided a cash flow breakeven potential in 2017. It sounded like during your remarks today, you had alluded to some capital efficiency and maybe potential for capital to be moving down. I didn't know if it would be fair to think that that cash flow breakeven number has potential to potentially move down and maybe if that played into your thoughts around the dividend increase.
Yeah. I think you're referring to the cash flow neutrality slide that we shared with you during the Analyst presentation. If you recall, it's a perspective of how we're managing our cash and how we manage the business. The organization is always trying to reduce that cost structure and improve the ultimate margins. You're correct. We feel fairly confident that we can achieve cash flow neutrality into the future. What we shared with you during the Analyst meeting was a very wide range on prices, but one that's reasonable with the low end being $40 flat real. You can see that we have good potential to reach that cash flow neutrality, particularly in 2017 forward. As I said earlier, we continue to reduce our cash expenditures and making good gains.
I would tell you that when we make the decisions around capital allocation, it's a consideration of a lot of factors. We're going to balance our long-term investment with our shareholder distributions. Nothing has changed. I'll tell you that we remain very committed to that reliable and growing dividend.
Okay, great. The second one is just project specific. I know you mentioned Kashagan coming online later this year. I think there have been some press reports suggesting that could get pushed out to 2017. Can you remind me? I believe Exxon was slated to take over operatorship. Are you formally controlling the news flow on that, or are you relying on peers at this point?
No, the Kashagan is managed by the North Caspian Operating Company. What you may recall hearing is that that was restructured in a more conventional manner, and ExxonMobil seconded the director for NCOC. In terms of timing, what we're doing there is we're replacing the onshore-offshore gas and oil pipelines where NCOC is, and they're making good progress. They're progressing as per plan with intention to complete that by the end of this year and start up the facility.
Okay. Thanks a bunch.
Our next question comes from Asit Sen from CLSA Americas.
Good morning, Jeff.
Good morning, Asit.
Two upstream questions, one on Upper Zakum and one on West Africa. On Upper Zakum in Abu Dhabi, Jeff, there were talks to expand capacity to over 1 million barrels a day. Could you update us on the current thought process on expansion and where production is currently? Secondly, on West Africa, Exxon had decent success last year in starting up new projects, Kizomba in Angola and Erha in Nigeria. How would you characterize the current operating environment in some of the key countries, given all the reported fiscal stress? I know it's probably a generic comment, but any color would be helpful.
Yeah. Okay, Asit. On Upper Zakum, current production is around 650,000 barrels a day. The project itself is progressing well to increase capacity ultimately to 750,000 barrels a day. We are continuing to evaluate the opportunity to expand to a 1 million barrel a day development. Really nothing more to share on that.
Jeff, on the time frame for 750, is what time frame?
Getting up to that full 750?
Yep.
I don't recall. Probably around by 2018.
Okay.
On West Africa, like you said, we've made some really good progress, just a broad comment about globally, with country budgets feeling the strain of low energy prices, it is slowing down investment globally. That is a challenge to make sure that we progress those investments at a pace that is consistent with the resource owner. I'll say that we have a very strong inventory of opportunities in West Africa, we've got to do it consistent with the confidence in the fiscal basis in which we're making those investments.
Thank you.
Okay. Thank you, Asit.
Our next question comes from Roger Read from Wells Fargo.
Thank you. Good morning.
Good morning, Roger.
I guess if we could talk maybe a little bit about cost deflation, where you're progressing, both on the CapEx and the OpEx side, and whether, consistent with one of the questions asked earlier, if there was any seasonal component to that that we should be thinking about?
Yeah. Just to recap for the results that we had last year, we were able to reduce our total CapEx and cash OpEx by about $16 billion year-on-year, representing about a 16% decrease. In terms of going forward in 2016, nothing's really changed. We continue to manage the cost side as we always have, focusing on structural efficiencies, market savings, while maintaining operational integrity. I'll tell you, Roger, we still believe there's significant opportunity in streamlining the business and reducing the cost structure. I'd say, while it's early in the year, we're seeing a similar trend line as to last year. We will maintain that relentless focus on cost, regardless of whether we're in a low price environment or in a high price environment.
Just to give you a bit of a perspective, again, being very early in the year, our upstream unit costs for OpEx are down about 9%.
Along those same lines, at this point, oil prices have rebounded. The market's starting to think about an ultimate recovery in drilling activity. Do you take advantage? Consistent with your view on there's a lot more cost to get out, is this a point at which you'd want to sign contracts, lock in service capacity, service pricing, anywhere around the world, really?
Well, I would say, Roger, that in the downturn, we have been high-grading our service providers, and we've been locking in more favorable, more efficient service contracts. It's not something that we had stopped doing. One of the advantages of ExxonMobil is that we're able to invest through the cycle. That means that in a down cycle, we're continuing to spend a significant amount of money to capture value opportunities associated with that down cycle. Of course the organization, and you've heard me talk previously, Roger, about the global procurement business, but it's all focused around finding the lowest lifecycle cost. You're correct to say that in a low-price environment, there are some unique opportunities that we want to lock into.
Okay. Thank you.
Thank you.
Our next question comes from Neil Mehta from Goldman Sachs.
Hey. Good morning, Jeff.
Good morning, Neil.
Clearly $48 Brent's not a great price, but it's a heck of a lot better than $30 a barrel Brent. It feels like this market is moving in the right direction. Demand is growing, and we're seeing signs non-OPEC supply is coming offline. I just want to reconcile that with your view. Does Exxon believe that we are starting to see the signs of a sustained recovery in energy prices, particularly crude? Then, because you get to see the world through your portfolio, one of the big debates is a non-OPEC supply outside the U.S. really rolling over because of the decline rates? Are you seeing evidence that that supply outside the U.S. is actually falling off?
Yeah. The first thing I'd say, Neil, it's really a good thought around how the macro's looking and how the sector will respond to it. I'd say first and foremost is that, remember, we are price takers. We are not counting on price growth. What we are focused on is really maintaining a focus on the things that we control in order to create margin. Regardless of what it's going to do, it's going to do it, and we're going to keep focused on the things that we control. Second thing I'd say, it's just a little bit more expansion of what I was sharing with Doug earlier, is that underlying demand growth has been generally strong, and we expect this year will be in excess of the 10-year average.
I would say that in the first half of 2016, we're still oversupplied by about 1.5 million barrels per day. We do expect to see convergence in the second half with the seasonal demand growth, that's going to widen again in the first half of 2017. Remember, during this period of oversupply, we've been building up commercial inventories since about year-end 2013. Thinking forward, we are seeing convergence over supply and demand into the future, we've got this overhead of supply that's going to also have to work off over time. We're headed in the right direction. In terms of how and when that will happen will be anybody's guess. Remember, there's still a fair bit of uncertainty in terms of the supply trend and the economic growth near term.
Clearly we're seeing, as you're all aware, we're seeing North America supply dropping off pretty significantly now.
I appreciate that, Jeff. Two related questions here. First is any update on Torrance, second, what's the latest on Groningen?
Yeah. On Torrance, we have completed the repairs of the electrostatic precipitator, that we have received the approval from the regulator to go ahead and start operations. There's a number of things that we need to do to get it up and capacity demonstrated, we do expect the formal change in control to happen mid-2016.
Groningen?
On Groningen, as you know we continue to have a pretty significant impact on volumes in the quarter. It was close to 600 million cubic feet a day. NAM has made the submission for the new production forecast going forward, my understanding is that the regulator will review that by September of this year. Right now the cap is at 27 billion cubic meters, it has the potential to grow up depending on what the demand requirements are.
All right. Thanks, Jeff.
You're welcome.
Our next question comes from Paul Sankey from Wolfe Research.
Good morning, Jeff.
Morning, Paul.
Jeff, I was looking back at the interview that Rex Tillerson gave after the analyst meeting when he was asked about the AAA rating. What he said quite specifically is that there's been periods where Exxon's financial metrics have been worse than they are today, but you still retained a AAA rating. Obviously, as you mentioned in your remarks, you have been downgraded by S&P. Naturally, I went to S&P, what I saw there was the comment that maintaining production and replacing reserves will require higher spending from Exxon. It seems that given the financial metrics are not the issue, that it's an upstream issue that S&P is concerned about.
Can you talk about your ability to maintain production and reserves at the current level of spending and address whether or not they're correct in thinking that you are going to have to spend a lot more to maintain reserves and production? Thanks.
Sure, Paul. First I'd remind everybody that we've got a very large inventory of investment opportunities, over 90 billion barrels of resource in Our portfolio, if you recall in the analyst presentation, we provide a little bit more insight as to the type of projects and their potential capacity they can bring on over the time horizon. Of course, what we need to do is we need to make sure that as we mature the inventory of projects, that we're doing it with the greatest value proposition, I think we've made great strides in finding unique opportunities in order to reduce the cost structure going forward. I'd say, though, Paul, that we've been through these cycles for a long time. We've been able to maintain a very strong balance sheet.
We've maintained our financial flexibility through the ups and downs, our inventory looks very attractive going forward. We think all the elements are set right to continue to invest in an attractive way to maintain our industry-leading return on capital employed. The other point I'd remind you is that, as we showed in the analyst presentation, we have done very well in terms of efficiency of deploying investment dollars. If you recall the upstream capital efficiency chart that we used in an analyst presentation showing our capital employed over proved reserves, clearly we're distinguishing ourselves relative to others.
Okay, Jeff, because of time constraints, I'll just jump onto the other one. You again mentioned return on capital employed. I really struggle with you losing money in the upstream on an earnings basis, particularly in the U.S., and how you reconcile that with the measure of return on capital employed. Typically, we don't look at that. We look at the cash flow measure. Can you help us with the DD&A upstream, particularly in the U.S., so that we can get to the cash returns that you're making as opposed to these losses upstream? Thank you.
Yeah, we've got a very strong portfolio in the upstream. Remember that we invest with a long-term view that's informed by our long-term energy demand outlook. All of our assets are managed to maximize returns through the life cycle with the objective of maintaining positive cash flow in low-price environments. We'll continue to focus on those things that we control: cost, reliability, operational integrity. Importantly, we'll invest in attractive opportunities throughout the cycle that further enhance the asset profitability. We see significant value in our assets. Yes, we're in a low price period like we've been in the past. As I've said, we've really designed these assets to be very durable during a low-price environment. Our producing assets continue to generate cash flow. Over the long term, we will continue to demonstrate industry-leading returns on capital employed.
Okay, thanks.
Thanks, Paul.
Our next question comes from Anish Kapadia from Tudor, Pickering Holt.
Hi. Just another question on your project execution. I think Exxon has clearly shown leadership amongst your peers on project execution over the last few years. Exxon doesn't seem to have sanctioned any major upstream projects of note over the last couple of years, and I don't really see anything on the horizon to be sanctioned for this year. I'm just wondering, how do you intend to benefit from the quality of your project execution if you're not progressing with projects at the moment?
Well, thanks for the question, Anish. I tell you that we will announce our FIDs after the company's made that funding decision, we really don't project it. As I indicated just a moment ago, we gave you an insight through our analyst presentation in the F&O as to the type of projects that we're currently working on. We've really taken this down cycle as an opportunity to retest the value proposition for each one of these investment opportunities, and there are some incremental benefits that we're able to capture through anywhere from design changes to different ways to execute the project given the service market, to fiscal basis. This is a good opportunity to step back and make sure that we're really capturing the most value from these investments.
We gave you some line of sight on the upstream, I'll just remind you that we've got 10 major projects still underway in the upstream that will start up between 2016 and 2017. As well as we maintain a very active high-value work program, we gave you some insight on that during the analyst presentation as well with a very deep inventory of opportunities. In summary, I tell you a large inventory of investment opportunities that are in various stages of planning execution. When we get to the point where we've made an investment decision, we'll share that publicly. The pace will be consistent upon project maturity to maximize value and our prudent financial management. Then, of course, remember, Anish, that we've got a number of very large investments underway in our downstream and chemical business.
Okay. Thank you. Just one follow-up, more specifically on Nigeria, because you've got a number of projects that appear to have been in your project queue for a number of years. The Satellite Field projects, the Usan, Bosi fields. I see you've added yet another project, Owowo West, into that project queue. I'm just wondering what I suppose what's kind of prevented you from sanctioning some of those projects that I suppose have been around for a long time? What needs to change in Nigeria for you to be able to go ahead with projects?
Yeah. I tell you that some of these projects are a function of optimizing the design all the way through to getting alignment with partners and establishing the right fiscal basis to go ahead and make the investment.
Thank you.
Thanks, Anish.
Our next question will come from Edward Westlake from Credit Suisse.
Good morning, Jeff. Great call. So far very informative. Just gas. We've got oversupplied markets in the U.S., in Europe, and in Asia. Clearly, the best cure for gas prices being low is low gas prices. Demand will probably pick up as a result over time. Can you give us some sense of the magnitude of potential gas declines across the portfolio as you exercise capital discipline over the next four or five years?
Yeah. You're talking with respect to our portfolio, Ed?
Yes, I'm really thinking about base business. Obviously, we know that you've got some new projects coming on stream, operate by others, like Gorgon, et cetera.
Yeah. You've seen in our volumes, our gas volumes have dropped off in part and largely in the U.S., but in part that is due to a switch from gas drilling to higher value liquids drilling during this down cycle. Gas, Ed, we continue to be very constructive, growing at about 1.6% per year primarily driven by the power sector. LNG we expect to triple from current capacity between now and 2040. I think we've got the long-term value proposition well within our sight, and it's just pacing those investments consistent with that demand growth to make sure that we capture full value for it. We've got a very deep inventory of gas, and if you look at our proved reserves, it's somewhere around 45%-48% of our total proved reserves, comparable part in our resource base.
Of course importantly, it adds significant value to the value chain. It provides an advantage feedstock for us for our steam cracking here in North America. You may recall that we're in the progress of progressing the expansion over at Baytown for adding another 1.5 million tons per annum of cracking capacity. In conjunction with that, adding polyethylene lines over at Mont Belvieu. It's got a significant component of our future, very deep inventory. Pace will be a function of demand.
Maybe a specific on Asia Gas. You went, I think, from 4.1 down to 3.8 in the quarter. I think you mentioned PSC impacts in gas. Maybe just run through what's happening there. Is it sort of customers are exercising low DCQ on the LNG contracts or is there something else going on?
There were three major drivers there. One was planned maintenance, second one being asset management, some divestments, and the third one being price impacts.
You're not seeing customers exercise low quantity tolerances?
I really can't talk about specific contracts, but it's primarily driven by the three items that I shared with you.
Thanks very much.
Thank you, Ed.
Our next question will come from Iain Reid from Macquarie.
Hi, Jeff.
Morning, Iain.
Couple of questions for you. You talked about the North American U.S. Lower 48 liquids production's falling. ExxonMobil's production isn't falling, it's going up. Is this a kind of deliberate decision to invest countercyclically? You talked about your long-term vision, et cetera. Is it something specific to your acreage where you're getting more barrels out of your existing wells? Because you're contributing to the problem rather than the solution if you're growing your Lower 48 volumes. I got a follow-up after that.
I tell you, Iain, that as I said earlier, that we're able to continue to invest in the down cycle, that provides an opportunity for us to capture lower cost structure in the investments that we're making. Particularly in the Lower 48 unconventionals, it's allowed us to high-grade the rig activity. We're down quite significantly in terms of our peak rigs were in excess of 60. Now we're down to about 16. We have reduced our activity materially. We continue to pursue the attractive unconventional opportunities that we have, predominantly in the Permian and Bakken. We're getting great value for it. It just shows the value proposition that ExxonMobil's able to provide because we have the capability to invest through the cycle.
Okay. My follow-up question is on chemicals. Obviously very strong numbers in this quarter. The environment is obviously pretty favorable out there in terms of natural gas prices as feedstock, and also the fact that there's a lot of maintenance activities out there, so lower production. Looking a little bit further forward Those items are correct. There's actually more volumes coming on stream. In fact, you're building capacity as well. Do you see this kind of chemical cycle at the peak now and then going into a bit of a trough towards the second half of this year and into next year? Or does Exxon have a more positive view of the market?
Yeah. Currently, olefins and polyolefins have been pretty tight, demand is continuing to grow and it's outpacing capacity additions. I think that's an important investment opportunity. Remember, our investment decisions, Iain, are really founded on our view of long-term demand. On the chemical side, as I mentioned earlier, we expect demand to grow about 1.5% above GDP. Now, I'll tell you that underlying demand growth across the olefins, polyolefins, the aromatics, our specialties, has been fairly robust. Now sometimes the supply, the capacity additions are outpacing that's what you've seen, for instance, in paraxylene. Broadly speaking, the demand is robust and it's going to continue to grow, we think it presents some investment opportunities.
Even with the growth in ethylene supply that we're looking at in the U.S. over the next year or so?
That's correct.
Okay. All right, Jeff, very helpful. Thank you very much.
Thank you, Iain.
We have time for one last question, and that will come from John Hurlin from Societe Generale.
Yeah. Thank you. Just a quick one from me, Jeff, on Guyana. You have multiple structures in your lease area. In the event that you have multiple successes, should we consider Guyana to be kind of an analog to what you did in Kizomba a while back in terms of design 1, build many? My other question is, can you bring some of these longer cycle projects forward to take advantage of excess EPC capacity today? You did discuss how you're optimizing things, can you bring longer cycle projects forward to take advantage of a lower cost environment?
Yeah. On Guyana, John, good morning, John. I'd tell you that as I indicated earlier, it is really early days, we need to get a better handle of the full block potential. The question around design 1, build many, we're doing that across all of our businesses. I'd tell you the real modifier in that is design it once, continue to get more and more efficient in that design and reduce the cost structure. I would tell you it even expanded globally in terms of how you look at concurrent developments in different parts of the world to make sure that you're fully capturing the benefits of a robust design and execution. To your point around the engineering and construction contractors, yeah, their backlogs are certainly light, we are very mindful about pacing the investments to make sure that we maximize value.
We want to do it with a clear view on prudent financial management and maintaining our financial flexibility going forward. I'll tell you that one of the best opportunities that we have out there is the collaboration that we've been able to have with many of our providers and really encouraging them to bring forward lower cost solutions to see if we can make investments move quicker.
Great. Thanks.
Thank you, John.
That concludes today's question and answer session. Mr. Woodbury, at this time, I will turn the conference back to you for any additional or closing remarks.
Well, thank you. To conclude, I just want to thank you all again for your time and very good questions. It was an insightful discussion, I think, for all of us. We appreciate your time this morning, and we very much appreciate your interest in ExxonMobil, and we look forward to talking with you in the future. Thank you.
This concludes today's conference. Thank you for your participation. You may now disconnect.