Earnings Call: Q2 2015

Jul 31, 2015

Good day, everyone, and welcome to this ExxonMobil Corporation Second Quarter 2015 Earnings Conference Call. Today's call is being recorded. At this time, I'd like to turn the call over to the 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 2nd quarter earnings call and webcast. My comments this morning will refer to 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 2. Now turning to slide 3. Let me begin by summarizing the key headlines of our performance. ExxonMobil generated earnings of $4,200,000,000 in the 2nd quarter. We are delivering on our investment and operating commitments across our integrated portfolio. Corporation's results demonstrate sound operations, superior project execution capabilities and continued discipline in both capital and expense management. Downstream and Chemical earnings increased significantly from the Q2 of 2014, driven by higher margins, continued strong demand and the quality of our product and asset mix. Upstream production volumes of 4,000,000 oil equivalent barrels per day were 3.6 largely in Africa, Canada, Indonesia, Papua New Guinea and the United States. These results underscore the resilience of our integrated portfolio and the benefits of our disciplined capital allocation. In the first half of twenty fifteen, the corporation generated cash flow from operations and asset sales of 17.9 $1,000,000,000 with free cash flow remaining positive despite challenging market conditions. Moving to slide 4, we provide an overview of some of the external factors affecting our results. Global economic growth improved in the Q2 of 2015. The U. S. Rebounded after contracting slightly in the Q1. Europe improved marginally concerns on Greece. China's economy stabilized, while Japan's growth tapered. Crude oil prices partly recovered during the quarter, while natural gas prices declined further. Refining margins continued to strengthen in both the U. S. And Europe. Chemical commodity margins also improved, while specialty margins weakened. Turning now earnings were $4,200,000,000 which represents $1 per share. Corporation distributed $4,100,000,000 to shareholders in the quarter through dividends and share purchases to reduce shares outstanding. Of that total, dollars 1,000,000,000 was used to purchase shares. CapEx was $8,300,000,000 which is in line with plans. We have remained focused on structural improvements through capital efficiency as well as the capture of additional cost savings in a softer market. Cash flow from operations and asset sales was $9,400,000,000 and at the end of the quarter cash totaled $4,400,000,000 and debt was $33,800,000,000 Next slide provides additional detail sources and uses of funds. So over the quarter, cash decreased from $5,200,000,000 to $4,400,000,000 Earnings adjusted for depreciation expense, changes in working capital and other items and our ongoing asset management program yielded $9,400,000,000 of cash flow from operations and asset sales. USIS included net investments in the business of $7,100,000,000 and shareholder distributions of $4,100,000,000 Debt and other financing increased cash by $1,000,000,000 Share purchases to reduce shares outstanding are expected to be $500,000,000 in the Q3 of 2015. Moving on to slide 7 for a review of our segmented results. ExxonMobil's 2nd quarter earnings of $4,200,000,000 were down $4,600,000,000 from a year ago quarter. Lower upstream earnings were partially offset by stronger Downstream and Chemical results. Gains on asset sales were $1,200,000,000 lower than the Q2 of 2014, reflecting the absence of the Hong Kong Power and Canadian asset divestments in the upstream segment. I'll also note that our corporate effective tax rate was 45%, up 4 percentage points compared to the year ago quarter and up 12 percentage points sequentially. This higher tax rate reflects the relative mix of income across geographies and tax regimes as well as a one time increase in the corporate income tax rate in Alberta, as lower as lower upstream and downstream earnings were partly offset by higher chemical results. Guidance for corporate and financing expenses remains at $500,000,000 to $700,000,000 per quarter. Now turning to the Upstream financial and operating results starting on slide 9. Upstream earnings in the second quarter were $2,000,000,000 down $5,900,000,000 in the Q2 of 2014. Sharply lower realizations decreased earnings by $4,500,000,000 where crude declined by almost $46 per barrel and gas was down almost $2.40 per 1,000 cubic feet. Note that favorable volume and mix effects increased earnings 3 $30,000,000 driven by production growth on our new developments. All other items were negative $1,700,000,000 and this was driven by the absence of divestment gains from Hong Kong Power and Western Canadian Assets, which represented $1,600,000,000 Also the higher income tax rate in Alberta, Canada resulted in a negative $260,000,000 non cash deferred tax adjustment. Lower operating costs provided a partial offset. Moving to slide 10. Oil equivalent production increased 139,000 barrels per day or 3.6% compared to the Q2 of last year. Liquids production increased 243,000 barrels per day or nearly 12%, benefiting from new projects, work programs and favorable entitlement impacts. Natural gas production decreased 622,000,000 cubic feet per day or 5.8 percent, driven by regulatory restrictions in the Netherlands. Volume adds from the Papua New Guinea LNG and Hadrian South projects along with entitlement effects offset bill decline. Now turning to sequential comparison starting on slide 11. Upstream earnings were $824,000,000 lower than the Q1. Realizations increased earnings by $600,000,000 as crude was up almost $11 per barrel, while gas declined about $1 per 1,000 cubic feet. Unfavorable volume and mix effects decreased earnings by $420,000,000 driven by lower seasonal gas demand in Europe, regulatory constraints in the Netherlands and maintenance in the U. S. All other items reduced earnings by $1,000,000,000 mainly driven by unfavorable tax and foreign exchange effects and lower gains from asset sales. Upstream unit profitability for the the the first half of twenty fifteen was $6.74 Moving to slide 12. Sequentially, volumes were down 269,000 oil equivalent barrels per day or 6.3%. Liquids production increased 14,000 barrels per day on new project growth and work programs, partly offset by maintenance, entitlement effects and field decline. Natural gas production was down 1,700,000,000 cubic feet per day, driven by lower seasonal demand in Europe and regulatory constraints in the Netherlands. Moving now to the Downstream financial and operating results starting on slide 13. Downstream earnings for the quarter were $1,500,000,000 up $795,000,000 compared to the Q2 of 2014. Higher margins increased earnings by $1,100,000,000 Volume and mix effects decreased earnings by 80,000,000 dollars All other items reduced earnings by $230,000,000 driven by higher maintenance activities. Turning to slide 14. Sequentially, downstream earnings decreased $161,000,000 Stronger refining margins, mainly in the U. S. Increased earnings by $140,000,000 whereas higher maintenance activities reduced volumes and increased expenses by $160,000,000 $140,000,000 respectively. Moving now to the Chemical financial and operating results starting on Slide 15. 2nd quarter chemical earnings were more than $1,200,000,000 up $405,000,000 versus the prior year quarter. Our margins increased earnings by $340,000,000 Favorable volume and mix effects added $20,000,000 All other items increased earnings by $50,000,000 mainly due to asset management gains, partly offset by unfavorable foreign exchange effects. Moving to slide Sequentially, chemical earnings increased by $264,000,000 Lower margins decreased earnings by $10,000,000 Positive volume and mix effects increased earnings by $40,000,000 All other items added $230,000,000 as asset management gains were partly offset by higher maintenance. Moving next to an update on our exploration and project activities on slide 17. We continue to focus on pursuing a diverse set of high quality resource opportunities. In Guyana, ExxonMobil made a reservoirs. We are encouraged by these results and we're assessing commercial viability of the resource as well as evaluating additional potential on the block. In Romania, drilling continues in the deepwater Neptune block with 5 wells drilled to date. The potential for commercial development will be assessed after completion of the drilling program. In the Kurdistan region of Iraq, drilling activities on the Alkush block are underway and anticipated to finish later this year. Turning now to a status update on our new development projects. In Canada, the Kearl expansion project starting up ahead of schedule in June and is currently producing more than 100,000 barrels of bitumen per day. Bay's development of the Crow resource enabled us to draw significant learnings from the initial development project and capture lower capital and ultimately expected to reach 220,000 barrels per day. Eiraha North Phase 2 in Nigeria is another example of a capital efficient development. This subsea project utilizes existing processing facilities and avoids the need for an additional FPSO vessel. Deepwater drilling and subsea equipment installation are progressing with start up expected later this year. And at the Banyu Europe development in Indonesia, we continue to experience favorable well performance and production is now more than 80,000 barrels per day. The central processing facility is expected to start up in the next few months, which will enable the project to reach peak production of more than 200,000 barrels per day by year end. In the U. S, Lower forty 8 Onshore, we have maintained a measured investment program to unlock the value of more than 15,000,000,000 oil equivalent barrels. ExxonMobil is a leading producer onshore and the largest producer in the United States. Through our XTO affiliate, we operate in all major U. S. Unconventional oil and gas plates. Longer term, gas investment is paced with anticipated demand growth, whereas where investment opportunities remain attractive in today's price environment. Net production in these three areas was about 200 and 40,000 oil equivalent barrels per day in the second quarter, up more than 20% from the Q2 of last year. Throughout the commodity price cycle, ExxonMobil has a relentless focus on reducing costs and improving efficiency in our operations, while maintaining high operational integrity. We regularly assess our performance deliver results. XTO is a leader in exploration and development costs per barrel of proved reserves added, just one metric of many that are considered. This position is enabled by our disciplined and measured approach to resource development, deployment of proprietary technologies and our intense focus on efficiency and productivity. We also have demonstrated the capability to respond demonstrated the capability to respond quickly in a rapidly changing environment and to date have captured incremental savings of about 30% in drilling completion costs from the peak in 20 14. These savings include market benefits as well as ongoing structural cost efficiencies and productivity improvements across our operations. So I'd like to on its investment and operating commitments. Through mid year, ExxonMobil earned $9,100,000,000 benefiting from our integrated business, which captures value throughout the commodity price cycle as demonstrated by our downstream and chemical results. In the upstream, production increased to 4,100,000 oil equivalent barrels per day, up almost 3% year on year and it remains in line with our plans. Volume contributions from successful new developments underscore our superior project execution capabilities reputation as a reliable operator. Our operational results combined with continued capital discipline generated cash flow from operations and asset sales of $17,900,000,000 and free cash flow of $3,900,000,000 Our commitment to our shareholders remains strong as the corporation distributed $8,000,000,000 to shareholders through mid year. So regardless of value through the cycle. 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. We'll go to Phil Gresh with JPMorgan. Hi, good morning, Jeff. Good morning, Phil. First question, I just want to ask on the CapEx, what your latest thoughts are for the budget for this year? And then as we look ahead post-twenty 15 at the Analyst Day you said sub $34,000,000,000 that it was a bit vague. A lot of your peers have been talking about reducing their sustaining capital costs as we look ahead. So just want to get any thoughts from you about perhaps where CapEx could go over the next few years if you have any updates? Sure, Phil. I'd tell you that we have no new guidance on our so our CapEx guidance for 2015 remains at 34 $1,000,000,000 But having said that, given our ongoing focus on capital efficiency and the very successful capture of market savings in the current business climate, I think it is fair to say that there is a downward vector on that number. And that type of focus and efficiency will be carried on into the subsequent years. Having said that, I'll also note that we continue to invest in the business and we have a very attractive inventory of high quality opportunities. And given the financial flexibility we've got, we can garner some real benefits during the down cycle in a softer market environment. Sure. Okay. Second question is on the acquisition environment. It seems like others have been talking about the bid ask spread maybe starting to improve a bit here. Maybe you could just talk about what you're seeing or any attractive opportunities starting to pop up on your radar screen? And just more broadly as you think about the portfolio, are there places where you think inorganically you'd like to shift the mix over time? And I'm specifically thinking about short cycle. Yes. Well, I mean just broadly speaking on acquisition or what we'd like to say is asset management. We always keep alert to value We always keep alert to value opportunities not only to pick up what we believe is strategic and high value opportunities, existing portfolio. So we keep alert in terms of what we would target. If you step back and think about our the diversity of our always interested in expanding those positions or further high grading them. So I wouldn't suggest that as we consider focused in one area or the other, we're always looking for high grading the portfolio. Okay. And then just focused in one area or the other. We're always looking for high grading the portfolio. And Phil that also includes our exploration program. It is designed to identify higher value opportunities to be added to the resource base or maybe to displace what we see as not as relatively significant as the exploration program add to. Okay. Thanks, Jeff. You bet. Next we'll go to Doug Leggate with Bank of America Merrill Lynch. Thanks. Good morning, everybody. Good morning, Jeff. Good morning, Doug. Sorry, my line cut out there for a minute. So I hope this question hasn't been asked already. But there's 2 things I wanted to hit this morning Jeff if I may. First one is on tax. I'm trying to understand the extent of the I guess the mess on the international E and P that you were looking at anyway. And we're noting what Imperial did with their tax charge related to the change in the Canadian tax regime. So I wonder if you could address that issue first and I have a follow-up please. So if you look at our tax in the Q2 of 2015 relative to 2014, we're up just over 3%. I'd say that about 5% of that were associated with excuse me with one time tax items, the largest piece being the Alberta tax that I mentioned in my prepared comments. The rest of the closure on that down about 1% is really due to the portfolio mix of income across various business segments and geographies. If you look sequentially, Doug, we're up almost 12%. And again, the mix effect adds about a 6% increase and the one time items add about 6%, 4% due to the Alberta tax increase and then just under 2% associated with the absence of the Q1 U. K. Tax rate change. In absolute terms Jeff, order of magnitude it looks to us like that was somewhere around $0.10 or $0.12 in the quarter of non recurring non cash. Does that sound about right? Say a little bit more Doug on how you're coming up with that? So the I think the $320,000,000 was what Imperial took. That alone is $0.08 a share, right? Well, the Alberta as I said in my prepared comments Doug was about $260,000,000 ExxonMobil share. $260,000,000 Okay. Which I think Okay. All right. Fair enough. I'll go back and look at that. My follow-up is really on the downstream. I mean, obviously, I realized for commercial reasons you don't want to talk about torrents explicitly. But when we look at the kind of results that other West Coast operators have had and the relatively weak U. S. Downstream that you had, it kind of strikes me that you probably have some there's probably some merit in giving us some idea what the likelihood of taurines coming back online is without all the additional costs of importing gasoline and so on. So to the best that you can at this point Jeff, can you give us an order of magnitude in terms of timing as to when you expect Torrance to get back to where it ought to be? Yes. I think first if I could Doug just to comment on your statement about a very heavy maintenance period in the Q2 of 2015 and that had the downward impacts that I prepared comments. In terms of Torrance, I think you probably know Doug that some of the units of the refining are operational at reduced rates. We are producing gasoline by importing components and blending with refinery production. And I'll also say we're also producing distillates. We are progressing repair of electrostatic precipitator as well as pursuing interim options. It is difficult to provide you a time at this point given the definition work that's underway as well as the regulatory review that's underway. As we get closer to defining that timeline, we'll look for an opportunity to share that broadly. Appreciate you at least taking a stab at the answer. Thanks, Jeff. We'll go next to Blake Fernandez with Howard and Weil. Good morning, Jeff. Question for you on the gas volumes, which were fairly weak. I think you pointed out in the press release 622,000,000 cubic feet down year over year. Can you highlight the Netherlands component of that and maybe give us an update of for 1, what contribution the Netherlands had in that decline and then maybe some timing or outlook on when that may come back? Yes. The Netherlands was as you could appreciate a large comp point on it. It was about $600,000,000 in the Q2 relative to the prior year prior quarter. Okay. And any thoughts on when that may return to market? Well, the Netherlands on a quarter to quarter basis was all associated with the regulatory restrictions that the government has placed on the asset. And that will return over time, but it's going to be a constrained cap on what we can produce from the resource. Highlight some of the sequential decline. I guess, I know the benchmarks were up. I know you've got some issues with tax and whatnot, that $1,000,000,000 waterfall, other category, can you kind of highlight, what is in there besides tax? And then also if you could maybe highlight some of the LNG impacts? I know pricing got fairly weak this quarter. Yes. So like the on the $1,000,000,000 other component and this is the sequential comparison About 60% of that had to do with tax, 15% or so was ForEx and the rest is a number of other puts and takes. On your comment about LNG, let me just broadly say that our natural gas realizations had a negative effect of about $300,000,000 So to square that with the $600,000,000 increase in realizations, We had about $900,000,000 positive due to liquids and $300,000,000 due to negative gas realizations. Perfect. Thanks, Jeff. Very good. We'll go next to Evan Kalia with Morgan Stanley. Hey, good morning, Jeff. Good morning, Evan. Let me just follow-up on CapEx and the down cycle approach. I mean, your peers appear or at least are more vocal in cost cutting and laying off employees, increasing asset sales and reducing the forward CapEx guidance to close the funding gaps, while almost existential upstream struggle. So I mean your releasing call has been different. And is that just stylistic? Or does it mean a different approach by Exxon through the down cycle? Any comments there? No. I would back up and just talk fundamentally culturally the organization is designed to constantly focus on capital efficiency and cost management, okay? What we are looking for always Evan is to drive the cost structure down in the business, okay? And when we have a down cycle Equit Machine right now, we further are well positioned to quickly lead that cost curve in capturing market savings. Now on top of that, we've got that financial flexibility to invest through the cycle. And that does very much very well position us to capture those market savings in the down cycle. So in short, I'd say it is it's a focus regardless of where we are in the cycle. Likewise, on staffing, I mean, you mentioned comments about staffing. I mean, 1st and foremost, I want to highlight that our people are our greatest asset and they really drive the success of this company. Therefore, we take a very measured approach to managing our headcount given the cyclical nature of the business and the need for us to be ever more productive. And in doing so, we keep an unrelenting focus on capturing organizational efficiencies to keep the organization right sized, again, given the likelihood of business volatility. So if you look at our employee headcount, it has been coming down consistently since the merger of ExxonMobil, where we were at about 125,000 employees. Today, we're at just over 80,000 employees. And you may recall during the analyst meeting that the Chairman talked about some of this and he gave some examples by way of steps that we have taken well in advance of the down cycle in order to do exactly what the numbers are depicting. Right. And your CapEx appears to be trending at least below guidance so far this year. My follow-up on the downstream and maybe as it relates to the U. S. Upstream, Can you discuss like your crude transfer pricing assumptions between North American upstream and refining? I mean, it would appear that refining results that may not be entirely market based kind of understating refining and transferring some of that to your upstream. Is that any color there would be helpful. Thank you. Yes. I mean, it is very much market based. I mean, as you know that our integrated sites have the capability to run a very, very wide range of feedstocks. I can't get into specific pricing at all, but we have very competitive capacity within the U. S. We're the largest in the Gulf Coast and Mid Continent. As you know, our capacity increase is greater than our overall U. S. Production. So we're also out there picking up supplies that meet our systems' needs. Our Mid Continent Gulf Coast refineries have increased processing of advantaged North American crudes. Currently about 45% of the slate was North America in 20 11 and currently we're at about 70% in 2014. The key point I want to emphasize is that we get intrinsic value given the integration of our operations between upstream, downstream and the chemical business allowing us to really focus on optimizing the molecule, the value of the molecule. Understood. Thanks for the color. Ed Westlake with Credit Suisse has our next question. Yes. This is just a philosophical question. I mean, Jeff, you've got a great balance sheet and you've just reduced the buyback. Are you worried about future deterioration in cash flows due to the macro? Is this just a decision that's just made quarter to quarter without thinking about the implications? I know people are chattering in the market this morning that you're trying to conserve cash for M and A. So maybe just a comment there and I've got a detailed comment on the results. Ed, we just go back to fundamentally our business plans or our investment strategy comes from our perspective on the long term that we share with you all in our energy outlook. That's what really sets our business strategy and our investment outlook. Now stepping back from that, we maintain a very robust balance sheet as you say and we have the significant inventory investment opportunities over 90,000,000,000 barrels of high quality resource, a very strong inventory of downstream and chemical opportunities. But we're we manage the cash flow looking at the current business climate as well as the future outlook and we have a high degree of confidence in what we expect supply demand to do in the future. Fundamentally, we're committed to our shareholders and to continue to provide a reliable and growing dividend. And I think the continued buyback is evidence of the confidence that we have in an integrated business model. You mentioned the LNG impact, which was helpful. Obviously, Asia LNG prices might come in a spot market, particularly not contract, come under a bit of pressure as all of these Australian projects try and fight their way into market and they all have commissioning cargoes and some spot with them. Can you sort of give us a sense of how much flexibility in the overall contract structure your customers have to sort of say we're going to take minimum amount of volumes to maximize our advantage to take some of the perhaps cheaper spot cargoes that are available. I'm just trying to get a sense of is there a little bit at the margin of price risk and volume risk even to your sort of existing LNG business? And it's fine for you to say no there's not a big risk. I mean that could just be the answer. Yes. Sure. I mean I'll just remind you that a majority of our LNG is under long term contract. Yes. So we have very little spot risk and we've got diversion capability in the existing contracts to allow us to capture a greater value if it's there. So if Asia says no, you can put it into Europe or do something else from the Middle East. Okay. Thanks. Thanks, Ed. We'll go next to Neil Mehta with Goldman Sachs. Hey, good morning. Good morning, Neil. So it's pretty clear that there is a path to grow production through 2017 with some of these large capital projects that you talked about and seeing indications of production growth here in 2015. One of the questions investors frequently ask is how does Exxon grow production post 2017, which we'll probably get some line of sight on at the next Analyst Day when you roll forward past 2017. But any initial color about how you think about growth, especially if the forward curve proves correct post-twenty 17 would be valuable? Yes. Thanks, Neil. I'd say, 1st and foremost, just step back a moment and remind everybody based on that very sizable high quality resource base I've been talking about, we've had a very significant upstream investment program in place now for extended period of time whereby from 2012 to 2017, we had committed to our shareholders to bring on 32 high quality long life assets. We're about halfway through that in terms of starting them up. We had a very substantial tranche of them starting up in 2014 with 8. This year, we have another 7 starting up. As you go into 2016, 2017, we've got the rest of them coming on. The information that we had shared back at the analyst meeting, we were to grow capacity by about 1,100,000 oil crude barrels per day. And recognizing that those projects starting up in 2017 were just at the early stages. They would ramp up into 2018 and thereafter. We also shared, Neil, in our F and O review the list of projects that we've got on the table right now for 2018 forward. These are all in different stages of progress. Some are in development planning, some are in B. But that is the list that we are working on to bring to an FID decision. Some of these that we're working to further optimize in the current price environment, We some may have some opportunities to enhance the commercial terms. But as we get closer to FID's decisions, we'll signal where we are. As you indicated, we'll provide another update in March of next year, which will take us beyond the 2017 horizon. But all that said, I want to reinforce that we've got this very robust inventory of investment opportunities. And I don't want to focus just on the upstream, the downstream and chemical business as well. And that positions us well to be very selective on what we want to progress and when we want to progress it. And it gives us the capability on those other assets or investment opportunities to keep working on to make sure that we're capturing the greatest value from it. Thanks, Jeff. And then the follow-up is on that point about chemicals. It was one of the few places in the quarter where we saw real upside to our numbers. Just wanted to talk about what you're seeing from the macro and the chemical space. Clearly margins haven't compressed as much as some would have thought given the move down in Brent. And then just how you're thinking about growing that business on a go forward? Yes. So just broadly speaking, as you can appreciate there are structural difference in the chemical business. The U. S. Natural gas, natural gas liquids provide for very strong margins and advantaged polyethylene. In Europe, Asia Pacific, feeds, energy prices have been higher and we were at the bottom of the cycle in Asia Pacific, but we saw in the first half material improvement due to lower feed and energy costs. Specialty margins have declined over the past few years with capacity additions exceeding demand growth, but demand growth remains robust. So as we've said before, our long term business, we have a positive outlook for global demand expecting to exceed GDP by about 1.5%, or said another way, growing by more than 50% over the next 10 years of which about 2 thirds of that will be in Asia. So very well positioned to participate as you see that we're making some important investments like the expansion of Baytown. That allows us to continue to participate in the high value polyethylene market given the very low feed costs we have here in North America. Thank you, Jeff. We'll go next to Alan Good with Morningstar. Good morning, Jeff. I appreciate the comments on the cost savings in the U. S. Lower forty eight. I wonder if you could offer up what Exxon's seen as far as cost savings internationally. Free the projects under construction or maybe some currently in the development phase and maybe even offshore as well. Do you expect to capture similar cost savings there? And what would be some of the timing on that relative to what you've seen so far in the U. S? Yes. Well, I would tell you Alan that let me break it up between capital and expense. And to answer your question right now, yes, we are capturing cost savings across our global portfolio. On the cost side, I just want to keep on emphasizing cost management is a fundamental driver in the success of our business. No doubt about it. And throughout that business cycle, our organization has a strong culture of driving down the cost structure. And then when we're in these down cycles, we expect to lead the cost curve and capture an additional market savings. So ongoing structure improvements and additional market savings in a down cycle. So we're very well positioned. And one of the things that allows us to react very quick, as I mentioned in the last quarter, is we've got a global procurement organization that is always focused on capturing the lowest lifecycle cost. And they are absolutely critical in managing our overall cost structure. As you can appreciate, Alan, savings vary significantly by region and type of service. By way of example, our base metals are down as much as 40%. Engineering services and construction labor is down 10% plus Rig rates are down across the board both land and floater. On floater, the day rates and mobilization costs are down anywhere from 25% to 40%. And so we're well positioned to capture that both on the cost as well as the capital side. Okay, great. Thanks. One more question, maybe a bit premature, but certainly made headlines of late. Along with the Iran deal, it seems that some of your peers are becoming interested. I know there's been some headlines suggesting Exxon is as well. What would you need to see in Iran as far as milestones before you potentially become interested in doing business there? Alan, I'll just say that we'll continue to monitor the circumstance. And we I want to be really clear that we'll remain in full compliance with existing sanctions. As you know, there are multiple sanctions that apply to U. S. Companies. That's all I can really say about that right now Alan. All right. Thanks. We'll go next to Asit Sen with Cowen and Company. Thanks. Good morning, Jeff. Good morning. Two questions. Thanks for the additional color on Lower forty eight. Wondering if you could give us the breakdown in production and rig activity by the 3 main unconventional plays and talk about how you expect things tracking in the back half of the year? Yes. So really good growth there. I mean from a net production base is, as I said, we're producing about 240,000 barrels a day, over 20% increase quarter on quarter versus the prior year. Permian is about 120,000 barrels of that Bakken just over 80,000 barrels and Woodford is about 40,000 barrels. And rig activity please? Yes. So our rig counts have come down just a little bit. From the Q1, we're down about 10 rigs. We're currently running 34 rigs in those three plays. We've been able to continue to high grade the activity. I think as we showed in the analyst meeting, we continue to capture both cost efficiencies and productivity improvements. A lot of what we learned in these plays are being quickly shared to make sure that we're integrating all those learnings into our forward execution plans. But very pleased with the positions that we've got in those assets and we've got a very sizable inventory of drillable prospects. So would you think that there would be upside to the incremental 2017 target? I think it was 150,000 barrels a day. Would you give inefficiencies? Well, I mean, we'll keep a measured pace as we said previously. If you think back over the ups and downs, when everybody was really picking up a lot of rigs, we took a measured pace and made sure that we were going at a pace that we can fully capture the benefits of the learnings that we were realizing. Likewise, in the down cycle, our rig counts haven't come down as significant as you've seen in industry because we've been able to capture those learnings. The economics of these investments are still robust. So I would give you a response of a measured pace that with a very attractive inventory of opportunities, we'll keep moving forward and anticipate as we showed in the analyst meeting a growth in our unconventional liquids volumes. Great. And my second question is on LNG. Spot LNG market has been surprisingly strong over $8 near term would be 15% oil equivalent. Just wanted to get your thoughts on that. Is it seasonality or something else? And could you update on the demand pattern that you're seeing in Asia? Well, I think I mean broadly speaking, I mean as you can appreciate there's a lot that goes into this. As we've said, gas demand has grown at about 1 point 6% per year. LNG capacity will probably triple from 2010 to 2,040. So you're seeing a general demand growth that's underpinning obviously underpinning realizations. There are a lot of other country level dynamics like alternatives, power, fuel switching from coal to gas, all those variables really play into this 1.6% per year that I mentioned. Thank you very much. Paul Cheng with Barclays has our next question. Thank you. Jeff, good morning. Good morning, Paul. Two questions, if I could. If we're looking at your very sizable total resource which is over RMB90 1,000,000,000, do you have a rough estimate that what's the percentage of that resource base already passed through all the regulatory hurdle and with today's technology we'll be able to produce and earn a 10% after tax internal rate of return at $60 to $70 brand price? Any color you can provide? Yes. I would tell you I'd ask you to think about it differently Paul in that the resource base is in various stages of development planning. Some assets clearly as I indicated previously right now in development planning and pre FEED. Some of the assets are probable reserves and are possible or static resources are under various stages of development planning in order to ensure that we are defining the most attractive returns for those resources. And some we make it to the point Paul that we have a better alternative to monetize that that may include divestment. But it's a dynamic resource base that is constantly being upgraded with new additions, pulling things out that we don't see as creating value for the corporation. And I'll give you one example by way of illustration. You think about the sizable Julia resource and how we've optimized that to a very much smaller initial development in order to derisk the overall resource size. That's the type of optimization that I'm talking about. And based on that de risking, it will better position us on future investment opportunities. Great. Second question just some quick number. I think in a number of your segment that you have some asset sales gain. Can you just give us what is the asset sales gain in the Q2 by segment and breakdown between U. S. And international? And also tell us what is the current production in Phase 1 and Phase 2 separately? Thank you. Yes. So in terms of the earnings impact from our asset sales in the second quarter, it was about $490,000,000 A majority of that poll was in the chemical business. In terms of Kearl, it's in total as I said is producing about 130,000 barrels per day. About 130,000 barrels per day. The Phase 1 or the initial development was around 100,000 barrels and Phase 2 is around 30,000 barrels. Jeff, do you have a latest number in July in the last couple maybe a week or so on Kearl? On Kearl, no, I don't have anything to share at this point. Okay. Thank you. We'll go next to Roger Read with Wells Fargo. Yes. Good morning. Good morning, Roger. I guess one question hasn't really been asked. I'd like to get out there. Oil prices this low. Last time we had a sustained lower for longer situation, a lot of mergers in this space. I know you don't want to talk about anything specific, but as a general sort of commentary on maybe the bid ask spread that's out there, the type of assets that might be interesting to Exxon, if you could give us any clarity on that? Yes, Roger, that was similar to an earlier question. As I said earlier, I would just say that we keep alert to where we've got value propositions. And the way I clarify that is bolt on acquisitions that have natural synergies with our business, long life assets that we think that our expertise and operating experience will bring intrinsic value associated with it. It's not focused on a specific resource type, but it's really focused on where we think that our unique experiences can add value that others can't see. And on the bid ask spread is there maybe how that's if it's changed at all, if there's anything you can add there? Yes. Roger, I really don't have much to add on there. I mean, that's really a function of the transactions. I mean that certainly stay in a lower price environment is going to encourage both buyers and sellers to find closure. Okay. And then as a kind of the unrelated follow-up. In Guyana, the big discovery, is there any sort of time line at all we can be thinking about at this point for that the next appraisal well? And then if that goes, how we should think about some of the other things including the, I guess, border dispute with Venezuela, etcetera? Yes. Well, as I said, we're certainly very encouraged by the first well. It is one well in a very, very large block. We are currently evaluating that well and we're laying out the if you will the plans moving forward. You can expect the intent to for us to not only further appraise the discovery, but pursue other opportunities on the block. I want to be clear though that we follow all the laws within the host countries and international law that we're operating on this block and the license from the government of Guyana. And the border matters are really a function or should stay with the governments to address through appropriate channels. Thank you. We'll go next to Ryan Todd with Deutsche Bank. Great. Thanks, Jeff. Maybe if I could one follow-up on cost. I know you've talked about cost control efforts a couple of times already, but maybe not on the CapEx side, but if we look on the OpEx side or the expense side within the company, I mean, any a lot of your competitors have talked about percentages in terms of year on year decreases and OpEx or targets in terms of absolute numbers that they think they can pull out of the business. I mean, any guidance you can give us in terms of maybe where your cost structure might be year on year or how much do you think you might be able to pull out on a relative to the 2014 basis? Obviously, our objective is to make sure that we're capturing all those opportunities both structural and market out there and at the same time ensuring that we maintain the high integrity of our operations. I think, Ryan, the ultimate measure here is our industry leading unit cost performance that we've seen over the last several years. And while it's still early, I don't want to go too far with this, We are seeing the unit cost on a downward trend year to date almost 9% down from where we were last year. But that's about as far as I'll quantify at this point. Obviously, this is a key element to ensuring that we remain a leader in unit profitability as well. Great. Thank you. And maybe one question on LNG and thoughts over on the business. We've had a number of questions on kind of on spot pricing and trends. But if you look at you've got a decent queue of potential development projects that could happen at some point over time. Can you talk about maybe what would be the threshold that you would need to move forward on some of these projects? Is it local permitting? Is it an effort on reducing costs in the industry and getting costs down to places competitive? Is it a wide bid ask spread between buyers and sellers right now? Any thoughts in general, I guess, on your asset portfolio on LNG on the development side and what you're seeing in the market? Sure. Broadly speaking, as you know, LNG is a key component of our portfolio and it's an important part of our margin generation. As I said earlier, we've got a very good inventory and including in that inventory is a number of LNG projects. And it's all based on our assessment as I indicated that gas will grow by about 1.6% per year between now and 2,040. And more specifically, LNG demand will triple from 2010 to 2,040. So that is the value proposition we're pursuing. We've got a number of projects moving forward concurrently. We're going to be very selective in what we invest in. To your question about what does it take to make it go forward, it's all the things you mentioned. It's making sure that we get a competitive cost structure that we've got stable transparent fiscal terms to underpin a very capital intensive investment. And that's why we're progressing several of them at the same time. I would tell you that the kind of the brownfield type expansions are probably going to be the lowest cost LNG add. By way of example, our Papua New Guinea project, just a phenomenal outcome, started up ahead of schedule, very, very good reliability, very well positioned to compete in expansion should we identify sufficient resource. Having the assets that we have in the U. S. Positions us very well. Alaska, West Coast of Canada continue to progress. Those opportunities will require more of what we were talking about in terms of cost, in terms of fiscal terms, regulatory environment. So in short, what I'd say Ryan is that the demand projections there, we've got the obviously we've got the capability to participate in that and we're very well positioned with a very good inventory of high quality opportunities to meet that demand growth. All right. Thanks, Jeff. We'll go next to Brad Heffern with RBC Capital Markets. Good morning, Jeff. Good morning, Brad. Just looking at the downstream business, there have been a lot of press reports and or regulatory filings about a potential substantial expansion of Beaumont. I was wondering if you could comment on that, provide any color around the thinking there? Yes. So just again taking a portfolio look Brad, we regularly evaluate our assets, our various business lines for where we can grow earnings or optimize the long term value of it. And in the downstream business, it's focused in the following areas: expanding our logistics, expanding our feedstock, reducing our overall cost structure and importantly increasing high value product yields. You'll see that those one of those areas or one or more of those areas will underpin the investment projects that we have communicated have been through FID such as the Antwerp investment. As it pertains to Beaumont, we typically assess those activities. I understand that they're that may include some discussions with regulators. It doesn't indicate that we've made a decision. And when we get close to an FID and we've made that decision that we'll communicate that accordingly. Okay, understood. And then looking in California on the upstream side, I was curious what the impact during the quarter was given the Plains pipeline downtime and what the outlook is there? Yes. So good question, Ryan. I mean, the as you all know, the Plains All American pipeline was down due to a failure of the line in the Q2. We've looked for options to go ahead and keep our facility on without that pipeline running or until we're able to find alternative export route, SYU will be shut down. Before it was shut down, it was producing somewhere around 30,000 barrels a day. In fact, that was a 2014 number. So we'll keep focused on it. We'll keep working with the regulator as well as the All American pipeline to identify the earliest restart. Okay. Thank you. We'll go next to Anish Kapadia with Tudor, Pickering and Holt and Company. Hi. Yes. First question is just looking at some of the growth projects again for post-twenty 18. It seems to me like it's you're focused on 3 key areas or themes if you like, which are getting a bit more challenged over the next few years. So when you look at international LNG, it seems to be a lot more competition coming in from domestic U. S. LNG. When you look at your oil sands projects, they're relatively high cost impacted by potential carbon pricing and higher taxes coming through. And then Nigeria, clearly a difficult political environment there and tax uncertainty. Just wondering given those are kind of your key areas, how comfortable are you with those areas and the potential growth there? Anish, we're in the risk management business. Everything that we do has a level of risk that we've got to judge whether it be geopolitical risk, economic risk, technical uncertainty. And that is the world we live in. And I think the organization has demonstrated over the years that it's got the expertise and the capability to take on these more challenging resources So the areas you talked about, So the areas you talked about, I mean, take a look at Papua New Guinea LNG. I mean, no infrastructure. We were able to build that into a very successful project that's going to supply an important part of LNG demand in the future. We have a good track record in all these areas. We're very good at capturing the learnings and transporting return. And as I said to Paul earlier, if we don't see the value proposition there, we will find other ways to monetize that asset. Okay. Great. And just a follow on. In terms of your future projects, I'm just thinking, how do you think about delaying projects in an attempt to in this kind of falling service price environment to capture lower prices? Is that something that you're actively kind of looking that you referenced earlier are multi year projects. They happen over a period of time. And we are looking for not only the market savings, but I'll stress again the structural savings. And let me use an example of what I'm talking about. We went forward with both the Arkhut and Doggy and the Hebron developments concurrently because we saw a very consistent development option and the tremendous benefit that we get by learning curve advantages. So both GBS, we used a comparable design shop for both of them. We used the same GBS contractor. We used the same top side contractor. And we capture that immediate learning curve benefit. On top of that, in a lower price cycle, as I said organization to be 1st in line in capturing those market savings. And if the given our long term investment and our expectation of what demand is going to do, we're very confident that over the timeframe, I mean, the things we're investing in today, some of them we won't see production on for 5 or 10 years. We're very confident in our demand projections and our ability to turn that into accretive financial performance. Understood. Thank you. Our next question comes from Paul Sankey with Wolfe Research. Hi, Jeff. Good morning, Paul. Jeff, when I hear what you're saying about costs and potential M and A, and knowing what you said in the past about the Permian, it feels like that's the best opportunity for you to combine the overlap that you have with the potential to drive out costs. I think you've highlighted that it's a very fragmented zone. And I would also think that the Bakken is similar, but you really don't have a lot in the Eagle Ford. So my assumption is that essentially the Permian would be the most attractive place for you and then the Bakken to take advantage of this low price environment? Thanks. Yes, Paul. I mean, I just broadly speaking, we keep focused globally and we've got those type of opportunities in other countries that will naturally maintain a line of sight on should the right value proposition come forward. If you want to focus in the unconventionals, certainly the ownership structure in the Permian by way of example is very diverse. And where we can find natural synergies, I mean, over the last several years, we've made a number of bolt on acquisitions that have increased our position there. And you get value uplift when we're able to do that where we where it's within our operational structure. Yes. And I guess the operational structure is well suited because of the XTO separate division you have gives you the flexibility? That's correct. One thing I'm worried about Jeff is reserves replacement just insofar as I don't think you've had any FIDs this year. And I also noticed that your reserves booking last year were heavily dominated by the U. S. Could you update us on where we stand as regards to reserves replacement? Thanks. Yes. Well, obviously, that's an annual process. And we're we've fully replaced our production for 21 straight years. We've got a very good inventory that we're working on to convert to an FID decision and proved reserves as well as a very active exploration program. So we've been very successful same. Jeff, do you know how many FIDs you had last year? Not off the top of my head, Paul. No. I'll leave it there. Thanks, Jeff. Thank you. Thank you, Paul. We'll go next to Alastair Syme with Citi. Hi, Jeff. Thanks for your comments on operating costs earlier. Can you give us some sort of magnitude about how much of that 9% you might feel is natural deflation in the environment like energy prices? And how much is your own cost management? No. Alistair, I'd just tell you that the organization wants to keep focused on the structural improvements as well as that market capture. Everything is under focus constantly even when we're at $100 per profitability between the base and derivative businesses? Remember, it's all premised under very strong demand growth. And our investments are strategically placed in order to make sure that we can compete competitively over that timeframe. I think we're very well positioned in both the commodity and specialties markets. Okay. Thank you very much. We'll go next to Guy Baber with Simmons and Company. Good morning, Jeff, and thanks for fitting me in here. You bet, Guy. Jeff, you highlighted on slide 18 Lower 48 Onshore F and D costs, best in class by substantial margin. I believe those costs have been declining in recent years as well and likely continue to decline. So I was just wondering if you could discuss how that positive trend for U. S. Lower forty eight F and D compares to the trends that you are seeing internationally and that you've seen in recent years, where it appears F and D for the industry has risen considerably in some cases. So can you just discuss your thoughts on that divergence, what you're seeing? And also how that might influence capital allocation and strategy long term? So specifically does it lead you to believe you need to find a way to allocate more capital to the regions where you can most efficiently add reserves which appears to be the U. S? Yeah. I think it's an excellent question, Guy, because I think this is just one example of what we do across our whole global portfolio. I talked about by way of another example, we've shown you the XTO example in my prepared comments, I talked about Air Hawk North Phase 2. Last quarter, I talked about the startup of Kazama Satellites Phase 2. But that's another really good example that instead of that we sequence the resource development in a manner that we can fully leverage the fixed investment over a period of time. And what that does is that lowers our overall cost structure or E and D costs globally. And in a deepwater environment where we've got to be very careful that we've got very good execution plans and that we execute flawlessly. So it's a very strong focus across the world whether it's in the deepwater with the Kazama Satellites Phase 2 and Air Hog North Phase 2 or we're talking about the Arctic or sub Arctic like in Kootenaghi and Hebron. There is an ongoing emphasis to try to get that cost structure down. And that's why I made the point earlier that this is something that we have to work 3 65 days a year. It's not something that's driven by the price environment. It's driven by the need to be ever more productive and to compete in a market that there's a lot of investment dollars going in. So we keep line of sight on where we've got cost opportunities. Thanks, Jeff. And last one for me. Liquids production up 12% on the year, so obviously very impressive growth. Major projects ramping up, You get some PSC benefit obviously, but also appears like you're showing growth in some areas where you don't have high profile major projects, North Sea Oil, for example, but it appears that reliability uptime may be improving just across the portfolio. Is that an accurate observation? And is there any detail you can provide of how the base level of production is performing perhaps relative to expectations coming into the year because it seems to be doing better? Yes. It's another good question. And you may recall back in the analyst presentation, we spent a little bit of time. The Chairman showed a chart that tries to goes to quantify the volume add that we make with our focus on reliability. We are making very significant gains on improving overall operating reliability. And I'll emphasize not only in the upstream, but also across our manufacturing business as well. As we focus intensely on cost structure, we do the same on uptime and reliability and really try to transfer those learnings quickly across the corporation to make sure that once again we're best in class. Thanks, Jeff. You bet. Our final question for today comes from John Herrlin with Societe Generale. Yes. Thank you. Most things have been asked yet, but you've seen a lot of your IOC peers as well as some large cap E and Ps take significant impairments. You have a very robust resource base as you've stated. Are there any issues for say intermediate term projects coming off the books on a long term basis for Exxon? Well, there's 2 parts to your question. One is if we've got resources that are in a resource base that ultimately we don't see the long term value. As I indicated earlier, John, we will look for ways to monetize them, which may include some level of divestment. In terms specifically of impairments, as you know, we live in a commodity price environment that has great volatility. But as I've said several times in our energy outlook, the longer term market fundamentals remain unchanged. And the lifespan of our assets are measured really in decades. Therefore, our long term price views are more stable and quite frankly more meaningful for future cash flows value. So we expect the business to more than recover the carrying value of the assets on the books. Obviously, in the course of our ongoing asset management efforts, we do confirm that asset values fully cover carrying costs. Great. That's what I wanted to hear. One last one for me, which you probably won't answer. Guyana and Significant, you want to attach a volume size to that? Yes, John. I think it's just too early. I look forward to that time that I can have more discussion about it as well. But it's as I said, John, one well in a 6,600,000 acre block, it's a very good start. And just watch that space. There's more to be said there I think. Okay. Thanks very much, Jeff. You bet, John. With no further questions in the queue, I'd like to turn the call back to our host for any additional or closing remarks. Well, to conclude, again, I want to thank you for your time and your very thoughtful and insightful questions this morning. We appreciate the opportunity to talk about the business and really share the successes of our people that work day in and day out to make sure that we're creating shareholder value. So thanks again and we look forward to further discussion in the future. Ladies and gentlemen, that does conclude today's call. Thank you all for joining.