Exxon Mobil Corp (XOM) — Q2 2018 Earnings Call Transcript

Thank you, and good morning. Welcome to Exxon Mobil's second quarter earnings call. By way of introduction, my name is Neil Hansen. I assumed the role of Vice President of Investor Relations on July 1. I look forward to interacting with each of you and discussing Exxon Mobil's performance and long-term value proposition. That will include ongoing efforts to improve transparency and increase engagement, which we'll continue with the call today. As you saw with the earnings release this morning and as we will discuss during the call, the second quarter results were well below market expectations. We'll review some of the factors that resulted in that deviation. Although challenging in some regards, it was also a quarter highlighted by significant progress on key near-term priorities, along with a number of notable milestones related to strategic investments across the Upstream, Downstream and Chemical business lines. These investments underpin our plans to increase long-term earnings potential and shareholder value as we outlined at the analyst meeting in March in New York. As we've previously announced, part of our commitment to increase engagement is participation in earnings calls by members of our management committee, including participation by our Chairman, Darren Woods, for the fourth quarter and full year earnings review. Joining me on the call today is Neil Chapman, Senior Vice President of Exxon Mobil. Neil oversees Exxon Mobil's Upstream business. After I complete the review of the quarterly financial and operating performance, Neil will provide his perspectives on the significant progress we made during the quarter and investments that will create long-term shareholder value. Neil and I will be happy to take your questions following a few prepared remarks. Our comments this morning will reference the slides available on the Investors section of our website. I would also like to draw your attention to the cautionary statement on Slide 2 and the supplemental information at the end of the presentation. I will now move to Slide 3 and start by summarizing a number of developments that influenced second quarter performance, specifically as it compares to what we experienced during the first three months of this year. The Upstream benefited from the higher liquids prices experienced during the quarter. The increase in our average liquids realizations was generally consistent with the changing markers, including the $7.60 increase in Brent and the $5.10 increase in WTI. Upstream production in the quarter was impacted by seasonally lower gas demand in Europe and scheduled maintenance, which was undertaken to support operational integrity. A 25% growth in tight oil production in the Permian and Bakken relative to the first quarter provided an uplift to volumes as we ramped up drilling activities and secured logistics capabilities in an area that will continue to see tremendous volumes growth. We also achieved a number of significant milestones on long-term growth plans in Guyana, Brazil and Mozambique, which Neil Chapman will discuss in detail later on the call this morning. In the Downstream, seasonal increases in demand and higher levels of industry maintenance resulted in stronger industry-refining margins in North America and Europe. A widening Brent-WTI Midland spread with Permian production outpacing logistics capacity also helped to strengthen refining margins in North America. We safely and successfully carried out a significant level of scheduled maintenance during the quarter to improve operations and strengthen our refining network, partly in preparation for the upcoming changes for the International Maritime Organization standards, related to the maximum levels of sulfur and marine fuels, which will go into effect in the year 2020. Scheduled maintenance had a significant impact on second quarter refining throughput and associated expenses. The strengthening of the U.S. dollar relative to the euro and British pound resulted in unfavorable foreign exchange impacts. In line with our long-term strategy to grow higher-value products, sales of retail fuels and lubricants increased during the quarter. In addition, we expanded our presence in key growth markets like China, Indonesia and Mexico. We also made significant progress on strategic projects in Beaumont, Antwerp and Rotterdam to increase the production of higher-value products, including premium ultralow sulfur fuels and Group II premium lubricant base stocks. While long-term demand fundamentals remain strong in the Chemical business, we experienced weaker margins in the quarter as improved realizations were more than offset by higher feed and energy costs. On the other hand, the successful completion of strategic growth projects contributed to higher sales. Slide 4 provides an overview of earnings for the second quarter. ExxonMobil's second quarter earnings were approximately $4 billion or $0.92 per share, up 18% from the prior year quarter. The growth in earnings compared to the second quarter of 2017 was primarily driven by the Upstream, moderated by a $0.50 - or 50% decline in Downstream earnings. Earnings declined by 15% from the first quarter of this year with lower contributions from all three business lines. I will start the more detailed review of our second quarter results with reconciliations of the financial and operating performance for each of the business lines relative to the first quarter of 2018, starting first with the Upstream on Slide 5. Second quarter 2018 Upstream earnings were $3 billion, a $457 million decrease from the first quarter. Crude realizations rose nearly $8 per barrel or 13% versus the first quarter, while gas realizations were down slightly. Lower seasonal gas demand in Europe contributed significantly to a $180 million negative impact on earnings compared to the first quarter. Downtime, representing the impact on earnings from both lower volumes and increased maintenance spend, reduced earnings by $210 million, largely driven by scheduled maintenance in Canada. Other items, including higher exploration and production expenses, decreased earnings by $190 million. Finally, the absence of the first quarter gain on the Scarborough asset sale contributed to a reduction in earnings of $420 million.

Good morning, everybody. Thanks for joining the call. Neil, the number one Neil, has provided the details. But I think it will be useful before I get into the progress versus our objectives that we laid out in March to put my perspective on what you just heard from Neil. This quarter was a low point in terms of volumes in the Upstream and Downstream. In the absence of some unknown or extraordinary events, volumes will steadily increase through the second half of the year. In the Upstream, there are two messages. First, lower volumes in the second quarter versus the first quarter were due to the seasonality of our gas business. So I think you all understand it is primarily in Europe. That reduction was fully anticipated and was consistent with prior year's quarter-to-quarter variation. To our Investor Analyst Meeting in March, I said we anticipate our Upstream volumes this year will be roughly in line with 2017. Of course, that was, as I said at that time, absent of price and divestment impacts. Year-to-date, we've indeed seen an impact from price and from divestments. But on our full year basis is the major driver for reduction of our production forecast. When you combine this with the smaller impacts of unplanned downtime that we experienced in the first half, of course, with the Papua New Guinea earthquake being a significant part of that and the ongoing work to reduce our exposure to the lowest value U.S. gas business, we anticipate 2018 average volume will be around 3.8 million oil-equivalent barrels per day. And of course, again, that assumes no change in the current prices and no further divestments that impact volumes. Going back to reducing our exposure to the U.S. gas business. You saw the impact in Neil's discussion of volumes, but it did not to have a material impact in earnings. As I've commented previously, all volumes are not equal. There is a range of profitability on the volumes we produce. Our focus is on value, and we will continue to upgrade our mix and strengthen our portfolio. In other words, there's no structural change in the Upstream business from the perspective that I provided to all of you in March. A couple of comments on the Downstream business, downstream and refining business. As you have heard, we had a heavy turnaround in scheduled maintenance in the quarter. The cost and loss of sales from these scheduled outages was large and clearly had the most significant impact on the Downstream earnings. These are planned and were fully anticipated. However, as you know in the first quarter, we had significant losses due to reliability incidents in the Downstream. Unfortunately, the impact of these continued into the second quarter. We are not happy about it. We're all over it in terms of getting back to our expected reliability performance. We've thoroughly investigated. There's nothing systemic in these incidents. As of this month, these incidents that originated in the first quarter and carried through into the second quarter, they are behind us. Like the Upstream, there's no structural change in our Downstream business. We are on plan in terms of our strategy and the growth plans that we laid out in March.

Neil, best of luck in your new role. And to the other Neil, thank you for returning the call. So my first question was on the downstream. So it does let you impact quite heavily for some unplanned downtime. Hopefully, that's behind you. But could you just talk about the maintenance time for the rest of 2018, whether there's anything significant in either chemicals or refining that we should be aware of? And I've got a follow-up on U.S. gas.

Thank you, Biraj. Good morning, and thank you for joining the call. And I look forward to interacting with you and talking more about ExxonMobil and our value proposition. So your question on maintenance. One thing that we can say is that we do expect maintenance during 2018 and 2019 to be a bit heavier than normal. Within that, you would expect to see some seasonality, so a bit heavier in the second quarter, coming down a little bit in the third quarter. It's difficult for us to get into specific - mention specific activity at sites. But we can say that given the IMO 2020 change, other maintenance activity that we plan to do over this year and next year will result in a bit heavier activity and then you'll see some seasonality in that. I don't know, Neil, if you wanted to add anything.

No, I'd just say I mean I think I mentioned in my comments, I said that we were at a low point in terms of volume in the second quarter. So with that, you'd anticipate the volumes increasing, but it will be a moderate increase and we have a - still a heavy turnaround schedule in the third quarter and not quite as large as the second quarter.

My topic is performance improvement in the upstream. Meaning while it seems like whether because of a higher quality set of opportunities or improvement in process, that the outlook for return in Exxon's 5 key areas of investment is pretty positive. I think Neil made that case. Simultaneously, normalized returns on capital in E&P business declined significantly during the past decade or so. And it seems like there may be opportunities to create value through divestments, too. So my question is with your competitors divesting tens of billions of dollars of assets and either moving on to more productive areas or returning funds to shareholders through repurchases or whatever, also to their benefit, is there a philosophical reason why ExxonMobil hasn't been more assertive in this area? Or would you say stay tuned? So the question's about how you think about value-creation opportunities from underperforming parts of the portfolio?

Yes, Doug, this is Neil Chapman. Thanks for the questions, and you probably answered some of it in your question actually. You were referencing back to a comment that I made in March, I have no doubt, where I sort of indicated, and I didn't say it exactly this way, but it was sort of along the lines of watch the space. And what I really mean about that is we have some really strong value-accretive opportunities. And I commented at the time and I stand by this that they are the most advantaged perspective, the best set of opportunities we've had since the merger and the five, I just talked about the progress and I outlined them at the Investor Analyst call. Now - if you have a portfolio in the upstream, it's really important you don't just add. You look through - for the area, look for the businesses and the assets which don't deliver the same amount of value. And I indicated at the time, we are looking very hard at that, and that is indeed the case. There is certainly no philosophical intent to hang onto assets that are underperforming. It's far from it, Doug.

Let me also welcome one Neil and - both Neils actually, and second Neil for getting on the call this quarter. Guys, I wonder if I could just start with a comment, and I've got two questions. My comment is the market, looking at the numbers, clearly didn't know or didn't expect the downtime. You guys obviously did. It would be extremely helpful if you could find some way of signaling to us that these kinds of planned events are in your plan for the year to avoid the kind of volatility that we have quarter-to-quarter in your share price. So maybe something to think about. My two questions is, first of all, a follow-up to Doug Terreson's question on disposals. But Neil Chapman, I'd like to get very specific, if I may. There has been a lot of chatter from Qatar Petroleum about sanctioning the Golden Pass project and moving Upstream in vertical integration into onshore gas. So my question to the extent you're able to answer it is, is the Golden Pass sanction in your plans as it stood at the Analyst Day? And could you envisage yourself partnering upstream on your onshore gas production with Qatar Petroleum?

Yes, thanks, Doug. This is Neil Chapman, of course. And I'll make a comment on the downtime and the scheduled maintenance on refining. So I think it's a very valid point that you make. And of course, we're taking that into account. And Darren Woods talked about our drive towards increased transparency. And that's really our intent. And so we take your comment. And we will, of course, be looking at it. Okay, in terms of Golden Pass, we never - Doug, we're never going to say exactly when we're going to FID a project. It's very clear that we're actively involved with our partner QP on that project.

I just want to return back to the issue of performance improvement and actually related to the Downstream. I'm thinking back to the March investor update. It seems to me that the focus was pretty much on adding new capacity, new complexity to move the earnings dial. But would you recognize a comment that would say that over the last sort of 18 to 24 months is the underlying earnings performance of the Downstream looks like it's been deteriorating, vis-à-vis competition? And I just wondered whether you felt that the performance of the business as it stands right now can deliver the kind of earnings performance you're expecting over the next 7 or 8 years just by adding the capital that you talked about, and whether this actually quite significant performance improvement also needs to be delivered by that business.

Yes, Jon, this is Neil Chapman again. And maybe I'll take that question. I understand why you're asking the question on underlying performance. And I commented earlier on that we're not happy with the reliability performance that we have seen certainly in the fourth quarter, first quarter - fourth quarter of last year, first quarter of this year and rolled over, of course, into the second quarter. However, I don't recognize at all your comment that this may be signaling some underlying deterioration of performance. It's far from it. We are absolutely all over these reliability incidents. We pride ourselves in this company as being the leader in terms of safety, in terms of reliability, in terms of cost performance in all segments of our business and I would say probably as much as anywhere in the reliability and in the performance of our Downstream business.

Neil Hansen, welcome. Neil Chapman, thank you for making the time. We appreciate you doing this. Look, I want to start off on the Canadian side of the business. And getting the Kearl up to operational capacity has taken a little bit longer than expected. You outlined a credible plan at the March Analyst Day to doing that. So where do we stand on that effort? And then on Syncrude, there were some unplanned downtime here that you guys are working through. Lessons learned and where do we stand in terms of getting that to where you want to be?

Yes, let me start with Syncrude, if it's okay, Neil, and I'll come back to Kearl. On Syncrude, of course, we had this significant outage in June. We're back online partially. We are not at full capacity right now. Obviously, the operator, we're in close contact with them. They're anticipating a return to full production sometime in September. This was a significant outage; big power outage, caused a lot of damage. We're back now. It will have an impact - did have an impact on volumes in the second quarter, maybe order of magnitude, 10 KBD, something like that. We'll be back online in September. On Kearl, what I said at the Analyst Meeting in Kearl is consistent and it is still the same today. We are targeting 200 KBD production this year. We are on plan to produce 200 KBD this year. We had some planned outage at Kearl. That is behind us now. Actually, the peak daily volumes coming out of that facility are way in excess of the 200 KBD. But in our mining operation, the key to being successful is ongoing reliability of these operations. We communicated sometime last year, I believe, that we are making an investment in a parallel crusher at Kearl. And why we're doing that is because that's the most vulnerable part of this production. And we feel that once we get that crusher online, that will enable us to make a significant step change in production. We're targeting to get up to 240 KBD in the coming years. That's what I outlined before. We'll get 200 KBD this year. And that's really the outlook on that facility. I mean, I hope it answers your question.

Thank you, Neil. To conclude, thank you for your time and thoughtful questions this morning. We appreciate your continued interest in ExxonMobil.

My topic is performance improvement in the upstream. Meaning while it seems like whether because of a higher quality set of opportunities or improvement in process, that the outlook for return in Exxon's 5 key areas of investment is pretty positive. I think Neil made that case. Simultaneously, normalized returns on capital in E&P business declined significantly during the past decade or so. And it seems like there may be opportunities to create value through divestments, too. So my question is with your competitors divesting tens of billions of dollars of assets and either moving on to more productive areas or returning funds to shareholders through repurchases or whatever, also to their benefit, is there a philosophical reason why ExxonMobil hasn't been more assertive in this area? Or would you say stay tuned? So the question's about how you think about value-creation opportunities from underperforming parts of the portfolio?

Doug, this is Neil Chapman. Thanks for the questions, and you probably answered some of it in your question actually. You were referencing back to a comment that I made in March, I have no doubt, where I sort of indicated, and I didn't say it exactly this way, but it was sort of along the lines of watch the space. And what I really mean about that is we have some really strong value-accretive opportunities. And I commented at the time and I stand by this that they are the most advantaged perspective, the best set of opportunities we've had since the merger and the five, I just talked about the progress and I outlined them at the Investor Analyst call. Now - if you have a portfolio in the upstream, it's really important you don't just add. You look through - for the area, look for the businesses and the assets which don't deliver the same amount of value. And I indicated at the time, we are looking very hard at that, and that is indeed the case. There is certainly no philosophical intent to hang onto assets that are underperforming. It's far from it, Doug.