Exxon Mobil Corp (XOM) — Q2 2020 Earnings Call Transcript

Thank you. Good morning, everyone. Welcome to our second quarter earnings call. We appreciate your participation and continued interest in ExxonMobil. I am Stephen Littleton, Vice President of Investor Relations. Before getting started, I wanted to say that I hope all of you on the call, your families and colleagues, are safe in light of the challenges our world continues to face. Joining me today is ExxonMobil Senior Vice President, Neil Chapman, who oversees our Upstream business. After I cover the quarterly financial and operating results, Neil will provide his perspectives and an update on the steps we're taking to navigate the current market environment and ensure we remain well-positioned for the recovery. Following Neil's remarks, I will be happy to address specifics on the quarterly reported results, while Neil will be available to take your questions on broader themes, including the corporation's strategic priorities, progress on spending reductions, updates on major projects, and views on market fundamentals. 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 this presentation. I'll now highlight the developments since the first quarter of this year on the next slide. In the Upstream, liquids realizations fell by about 50% compared to the first quarter as impacts from the coronavirus rippled through the global economy, significantly reducing demand. In response to the unprecedented market conditions, production was curtailed by approximately 330,000 oil equivalent barrels in the quarter. Despite considerable challenges, including global travel and supply chain disruptions, we were able to maintain strong operational performance in all of our businesses. We also progressed growth projects such as Guyana, with Phase 1 demonstrating nameplate production capacity, and we progressed Phase II FPSO topside integration in Singapore. In the Permian, the Delaware central processing and exporting facility started up, which enhances our integrated position in the basin through the collection and processing of production from our Delaware Basin assets and enables efficient, lower-cost delivery to Gulf Coast markets. In the Downstream, refining margins decreased from first quarter levels and were 50% below 10-year annual lows, reflecting the significant reduction in demand and the resulting impact of increased levels of product inventory. Refinery sparing was approximately 30% due to reduced demand. However, utilization improved through the quarter as we saw early signs of recovery from the lows, including demand for road transportation fuels. Although bottom-of-cycle conditions persist in the Chemical business, margins were sustained at first quarter levels, with lower realizations being offset by lower feedstock costs. While COVID-19 impacted demand in the chemical industry, the impact across our portfolio was moderated by resilient demand in the packaging and hygiene segments. At a corporate level, our people continue to support COVID-19 response efforts through our manufacturing operations and donations of critical products and resources, which Neil will highlight a bit later in the call. We also launched a collaboration with universities, environmental groups, and other industry partners to find new and better ways to monitor and reduce methane emissions. The first-of-its-kind effort called Project Astra is focused on developing an innovative sensor network in the Permian Basin to continuously monitor methane emissions across large areas to enable quick and efficient detection and repair of leaks, ultimately leading to lower emissions. Let's move to Slide 4 for an overview of second quarter results. The table on the left provides a view of second quarter results relative to the first quarter. Starting with first quarter 2020, the reported loss of $600 million included unfavorable identified items of $2.9 billion, driven mostly by noncash inventory adjustments. Excluding these items, first quarter earnings were $2.3 billion. Second quarter results included a $1.9 billion noncash benefit from inventory valuation, largely reversing the first quarter impact due to the improvement in commodity prices relative to the end of March and resulted in a second quarter U.S. GAAP loss of $1.1 billion. Excluding identified items, there was a $3 billion loss in the second quarter, down $5.3 billion from the first quarter, driven by the effects of COVID-19, including the unprecedented decline in oil and product demand, resulting in significant declines in prices. These impacts were in line with the market factors that we previously communicated. Within the quarter, April marked a low point, with results improving through May and June. However, it's worth noting that refining margins remain very challenged, notably in North America, with record high product inventories. Beyond the significant reduction in prices and margins, lower volumes in the quarter due to the demand impacts from the pandemic reduced earnings by $600 million. Lower operating expenses across all three of our businesses from reduced activity, lower overhead, logistics optimization, and supply chain efficiencies improved earnings by $800 million. These efforts demonstrate the progress we've made towards our 15% cash OpEx savings target. Moving to Slide 5, Upstream earnings, excluding identified items, decreased by approximately $3 billion, largely driven by lower prices, with liquids realizations down 50% and natural gas realizations down 25% versus the first quarter. Foreign exchange and other impacts reduced earnings by $360 million. Volume impacts were driven by the timing of scheduled maintenance activity and lower European seasonal gas demand. Expenses were lower in the quarter with savings related to efficiencies and work processes, reduced unconventional activity, exploration activity, and market-related savings, including lower contractor rates and lower rates on materials and supplies. On the next slides, I will provide more details on volumes. Upstream volumes decreased by approximately 400,000 oil equivalent barrels per day compared to the first quarter. Due to the challenging market conditions, we curtailed production in unconventional and heavy oil assets starting in April. Additional government-mandated reductions were implemented in May. As previously mentioned, natural gas demand was seasonally lower, primarily in Europe. Scheduled maintenance, notably in our LNG portfolio, also contributed to lower volumes. Compared to the second quarter of 2019, Upstream volumes decreased by approximately 300,000 oil equivalent barrels per day. In addition to the factors I just referenced, volumes were lower due mainly to the divestment of the Norway non-operated assets at the end of 2019. It's worth noting that half of the divestment impact was related to gas volumes. Finally, we saw continued liquids growth from our investments in the Permian, Abu Dhabi, and Guyana, reflecting the continued value growth we are focused on.

Thanks, Stephen. It's great to be on the call this morning. I hope that all of you joining us and your families are safe and healthy, and I want to extend the gratitude of everyone here at ExxonMobil to all of the men and women working on the front lines to fight the virus and to help those suffering from its effects. I'd also like to thank our employees for all that they are doing to support the response efforts globally. As we indicated during the first quarter, we anticipated the COVID pandemic and related economic shutdowns would significantly impact the financial performance of companies across multiple sectors in the second quarter, and we've seen that reflected in the results announced to date. As Stephen just discussed, the same external factors were evident in our second quarter earnings and cash flows. However, there's reason to be encouraged that we may have seen the trough in April when WTI hit a historic low point and then began to rebound as economic activity picked up and demand showed signs of increasing. By the end of the quarter, WTI had risen to around $40 per barrel, with Brent trading slightly above that, and oil prices have remained relatively stable at that level in recent weeks. I'd like to begin with a few overarching comments on one of the most challenging quarters this industry has seen. We have acted quickly and decisively while preserving long-term value. The organization has responded with a level of commitment and professionalism that has been exceptional. We rapidly adjusted our plans and asked the organization to deliver on very aggressive new targets. They have delivered. Through all of the challenges this environment has presented, we have safely maintained the integrity and continuity of our operations while also making the necessary adjustments to COVID-19 to provide a safe work environment for our workforce and support global response efforts. This success should not be underestimated. Essentially all of our global facilities, Upstream, Downstream, and Chemical, have operated without interruption. You can imagine the challenge of maintaining a virus-free environment on offshore platforms and refineries, where our workforce live and work in close proximity. We've had to charter planes to move our rotating operating staff all over the globe without the availability of commercial planes. We've had to lease hotels in multiple cities to quarantine our folks before they start their 30-day rotations. Our organization's ingenuity has been remarkable. We've responded quickly to the rapidly changing price and margin environment by shutting in facilities when necessary and capturing value from the rapidly changing prices, leveraging our extensive supply chains around the world. I'm very pleased with the progress we've made reducing costs and pacing investments to adjust to the market conditions. As Stephen described, we set very aggressive operating and capital expense targets. The organization is exceeding those targets, which positions us very well for the rest of the year. We ended the quarter with more than $12.5 billion of cash, which is in line with the business needs. Given this level of liquidity, we don't see a need to take on additional debt. Before I dive into the business, I want to highlight some of the amazing work our people have done in response to the COVID pandemic. These efforts included reconfiguring manufacturing operations, optimizing processes and delivery systems, enabling us to increase the production of essential chemicals that are critical to the world's medical response, including isopropyl alcohol for hand sanitizer and specialty polypropylene for masks and medical garments. Our people have stepped up to contribute educational supplies to schools, fuel and PPE for first responders and financial support to food banks and many other related causes. If you haven't already, I encourage you to visit our website to see all of the inspiring ways our employees have contributed during this time of need. Now I'll turn to what we're seeing in the markets. Consistent with oil prices reaching historic lows, our own retail sales reflect a bottoming of transportation fuel demand in April, followed by some encouraging signs of recovery. The shape of the recovery varies by region, though the demand in Asia recently surpassed where it was a year ago. This data is from the International Energy Agency. What we saw was a historic demand contraction for transportation fuels with countries around the world impacted at nearly the same time, but we are seeing a recovery from the recent lows. Reflecting the improving demand trends we're seeing, the IEA's view of the next 18 months is similar to ours. They're forecasting a rebound in road transportation fuels, with fourth-quarter 2020 demand expected to be at similar levels to the fourth quarter of the prior year. The recovery in jet fuel demand is likely to be much slower, with by far the sharpest reduction in demand and the slowest recovery expected. As you would expect, the impact of lower demand was apparent in the second quarter, the refinery crude throughput was about 15% below 2019 levels. This resulted in pressure on margins, which Stephen discussed a few moments ago. Looking more broadly at total liquids demand, the second quarter was down about 20% year-on-year, but it's important to note the actual loss of demand was not as severe as some had expected, considering the low end of the range was about 30%. Simply put, the demand distraction in the second quarter was unprecedented in the history of modern oil markets. To put it in context, absolute demand fell to levels we haven't seen in nearly 20 years. We've never seen a decline in this magnitude and pace before, even relative to the historic periods of demand volatility following the global financial crisis and as far back as the 1970s oil and energy crisis. In response to this lower demand, we saw a similarly unprecedented reduction of supply in the second quarter as OPEC+ was down approximately 11 million barrels a day in May and June. North American production shut-ins are estimated to have peaked at more than 2 million barrels per day. However, in line with the extraordinary drop we saw in demand, inventory levels increased to unprecedented levels, and we anticipate it will be well into 2021 before the overhang is cleared and we return to pre-pandemic levels. As mentioned, clearly, the industry has taken significant steps to reduce production. We have taken decisive action in this regard as well. Curtailment impacts in the quarter were about 330,000 oil equivalent barrels per day. Roughly two-thirds of these volumes were economic curtailments in unconventional and heavy oil. We brought the majority of production from our shorter-cycle unconventional plays back online in July as market conditions recovered. For our heavy oil assets, we took advantage of the economic curtailments to pull forward planned maintenance. At Kearl, we completed a maintenance shutdown on line 2, and it's now back online. In the middle of July, we shut down line 1 for similar planned maintenance, and this is expected to return to service in late August. Looking ahead to the third quarter, we anticipate an impact of approximately 200,000 oil equivalent barrels per day from curtailments, with about 70% of those mandated by governments. Turning to the Permian Basin. Second quarter production was nearly 300,000 oil equivalent barrels per day. That's a 9% increase versus the second quarter of 2019. We continue to anticipate 2020 production will be about 345,000 oil equivalent barrels per day. It's down just 15,000 barrels per day from what we discussed back in March, despite the curtailments and the sharp reduction in capital expenditure and still more than 70,000 barrels per day above the full year of 2019. During the quarter, we started up the Delaware Basin central processing and exporting facility, which we refer to as Cowboy. As I discussed in March, this is a key building block in our Poker Lake major development. As we've discussed previously, the short-cycle nature of our Permian assets also provides flexibility to pace development, reduce spend, and preserve cash in the current environment. We cut our rig count by about half, ending the quarter with 30 rigs in the Permian Basin, and we expect to cut that number by at least half again by the end of this year. Our activities for the rest of the year will be focused on Poker Lake, where we will continue to leverage our development scale advantage and utilize the above-surface investments that we have pursued in the last 18 months, including Cowboy. In light of the recent low price environment, we also pushed out the flowback of our largest to date cube development to the third quarter. This is the 27 well cube in the Midland Basin that I referenced at our Investor Day. Again, this decision reflects our focus on making the appropriate decisions to maximize the value of each well and adapt as market conditions become more favorable, including optimizing completion timing for our inventory of drilled but uncompleted wells. In Guyana, Liza Phase 1 demonstrated production capacity of 120,000 barrels per day during the quarter. The response to a mechanical issue that we experienced in May was slowed by logistical challenges of mobilizing technical experts and materials in-country due to COVID restrictions. So these are close to being resolved, and we expect to get back to full capacity with 100% gas injection in August. We're still actively investing for the future in Guyana, with four drilling rigs as of the end of June, with one on exploration and three on appraisal and project development drilling. Subsequent to the quarter end, drilling at Yellowtail 2 identified two additional high-quality hydrocarbon-bearing reservoirs, one adjacent and one below the Yellowtail field. Liza Phase 2 remains on schedule for a 2022 start-up. You can see the FPSO in the photo, which is currently in Singapore for the topside integration. We are continuing to work with the government on the approval for the Payara development plan. Without final resolution of the election results and signing in a new government, there is a potential for delays to the schedule. Having said that, it's very clear that all parties in-country understand the importance of progressing the developments quickly given the significant benefits to all stakeholders, especially the citizens of Guyana. Let's now turn to the progress we've been making on the aggressive cost reduction measures we put in place earlier this year, starting with capital expenditures. In April, we reduced our plan for this year by 30% to $23 billion. We're on pace to meet or exceed that target. In fact, our annualized run rate in the fourth quarter is expected to be around $19 billion, and we expect to be lower still in 2021. Savings during the second quarter were primarily driven by short-cycle unconventional activity, but I should note that we're also adjusting the pace of other investments in all of our businesses. As we previously mentioned, we continue to take a very thoughtful and comprehensive approach to these cost reductions in partnership with our contractors, partners, and governments. You will hear me say several times this morning the importance of addressing the short-term market challenges while conserving cash and preserving long-term value and future optionality. This helps us ensure that while investments may be deferred in some areas, the opportunities remain. Given the continued uncertainty and volatility, we will continue to adjust CapEx reductions as needed while also being mindful that the pullback we're seeing across the industry today could very well lay the foundation for supply challenges in the future, and we want to make sure we're positioned to capture the eventual upswing. Moving to Slide 13. Let me highlight the steps we have taken to improve liquidity and ensure the corporation is well positioned to manage the current market environment. During the quarter, we leveraged our access to capital markets by issuing approximately $15 billion in debt, including approximately $5 billion of euro-denominated bonds. This issuance enabled us to capture attractive euro bond rates and diversify our fixed income investor base. The corporation's total liquidity has increased significantly since year-end 2019. As Neil will discuss in greater detail momentarily, we believe we now have sufficient capacity to weather the near-term market challenges and preserve our long-term growth plans and capital allocation priorities. Let's turn to the next page for a look at the second quarter cash profile. Second quarter cash flow from operating activities was in line with our projections of the COVID-19 impacts. There was an increase in working capital in the quarter driven by a seasonal reduction in payables and a continued inventory build coming out of the first quarter associated with a steep reduction in demand. Gross debt increased approximately $10 billion in the quarter, reflecting the steps I just mentioned to increase liquidity in light of the current market uncertainty. As a result, we ended the quarter with $12.6 billion of cash. Turning to Slide 15. I will cover a few key items for consideration with regards to our outlook for the third quarter. In the upstream, economic production curtailments are expected to average 60,000 oil equivalent barrels as market conditions have continued to show improvement. And we're forecasting an impact of 140,000 oil equivalent barrels with a full quarter of government-mandated curtailments in line with public announcements. In the Downstream, we anticipate scheduled maintenance to be down slightly from the second quarter. However, as we reflect on the current business environment, including the high inventory levels, we would expect margins to remain very weak. In Chemical, we anticipate demand improvement in key durable and automotive sectors, partly offset by higher feed costs. Scheduled maintenance is expected to be in line with the first quarter of this year. Corporate and financing expenses are expected to be about $800 million, and we expect continued spending reductions consistent with our announced targets. With that, I will now turn the call over to Neil.

Thank you for your comments, Neil. We'll now be more than happy to take any questions you might have.

My first question is on the debt. And in terms of the commentary that Exxon doesn't need to take on any additional debt, it implies a price and CapEx assumption. Can you provide a little more color on what your price assumption is? And what range of demand scenarios would you look at compared to what you laid out in the presentation, which was really helpful? Just wondering also if the message is that Exxon will adjust CapEx through the price environment regardless of what the impact on production is in order to just pull the line on that debt.

Yes, this is Neil. Thanks for joining the call. Good to hear from you. Of course, as you are aware, in the response to this environment, which clearly has been unprecedented, we've never seen the market demand crash so far, so deep. We've never seen prices and margins crash so much, and that's why having a strong balance sheet is so important. And I would tell you, that's why the financial discipline of this corporation over many decades has been so critical. It means you can weather the big storms. It means you can weather the large-scale disruptions. And of course, it also means you can reward the loyalty of our shareholders by sticking with them when the business recovers and sticking with the plans we have in place to protect this balance sheet and maintain our dividend. As we've just been discussing or describing, we took really, really decisive steps for this year, so the short-term capital spending reduction of 30% to 15% in operating expenses. This is very much in line with what we saw in our April earnings call. You will recall that Darren laid out our plans then. What we said we needed to do at that time, we've done. The results are on track and are in line with our expectations. So we set out the plans for this year with these reductions. We're now developing plans that are going to enable us to maintain our capital allocation priorities over the near term, and these plans contemplate a price environment that's generally consistent with third parties. Of course, we've seen the third-party assessment of the price environment going forward converge, and we're in line with those. Our plans to maintain our debt at the current levels and maintain our dividend include further reductions in operating expenses, and we're working hard to identify additional opportunities to what I always describe as efficiently deferring more CapEx, and that preserves the optionality and the future value that responds to these short-term needs.

Okay. Great. That's really helpful. My follow-up, I guess, just on the further CapEx reductions that you mentioned. If oil prices are modest and you're looking to any potential delays from more projects, you've mentioned in the past that there's always a cost associated with delaying those projects. And so can you just address that? And what kind of projects you might think like the opportunities to defer? I know the run rate of $19 billion that you're talking about is significantly lower than the 2020 budget. On the flip side of things, given the project backlog, at what point does M&A become a more attractive option in sort of delaying things as a means to kind of grow the medium- and long-term cash flows?

Yes. Thanks, Jeanine. Well, we remain committed to progressing the structural improvements to our earnings and the cash flow that we've laid out for the last three years, but we have to be more selective in pacing those investments in light of the market environment. And of course, as we've described and actually Darren described as well in April, we've completed a thorough review of all of our ongoing investments and our ongoing investment opportunities. But in our business, that means you've got to work with the resource owners, you've got to work with the partners, you've got to work with the stakeholders. We've got to identify areas where we can defer spending but conserve cash in the near term and, of course, preserve that long-term value. What we have done, and I think we've done really successfully, is we've identified market efficiencies, we have identified project synergies that will offset the cost of these deferrals. But there will be impacts. I mean that's for sure. And there will be impacts mainly in timing, and that's to the earnings and cash flow potential that we've previously communicated. So it's clear, I think, from our comments and our actions. In the short term, we'll defend the balance sheet, and we'll protect the dividend by taking short-term postponements in capital investments. In terms of what we will do next year, of course, we're working through that now, and that's part of our annual planning process. And we're working through that now. And as you're well aware, our planned process concludes with a review with our Board of Directors in November. That will be the same this year as it is every year. And when we have clarity on what that capital spend will be next year, of course, we will communicate it to you. As I have mentioned in my comments, my expectation is our capital spending next year will be lower than the fourth-quarter run rate. In terms of M&A and could that provide a different option to -- I mean, Jeanine, of course, we're looking at that all the time. We're looking all the time. And if the right opportunity comes up, then we may elect to move on that. But what I would say is, and I said this before and I certainly said it at the Investor Day, we have, I would say, the very richest set of competitive investment opportunities within this company already. I mean I don't think there's a company out there that can compete with that, and so there's no need for us to do an M&A. We don't need to do that. We have very, very attractive investments to make, but we always look at that option.

Can you all hear me okay?

Sure can, Doug.

Yes, we can, Doug.

So, a lot of questions. I'll stick with two. Neil, you talked about your run rate CapEx being $19 billion in the second half and you're still growing the Permian and you're still executing Guyana. Can you then confirm that, that would still include growth capital? And what I'm trying to get to is some idea of what ExxonMobil sustaining capital is, in other words, ex-growth, if you can help me with that.

Yes, thanks, Doug. Just to clarify one point. Our run rate of $19 billion is in the fourth quarter, not the second half, just so you're aware. And what I said is, I expect, Doug, it will be lower. We will fund all the Guyana opportunities as they come forward. Of course, as we look at our capital spend, we're looking hard at the priorities on them. And Guyana, we will continue to fund, and you're well aware that Liza 2 is in construction. I'm confident we'll move on Payara as well. In terms of the Permian, one of the great attractions of short cycle is you can take that capital off quickly. And of course, you can put it back on pretty quickly as well. Our current planning is that we will continue to reduce the number of rigs we have out in the Permian through the second half of this year. I think we are about, if I remember the numbers, about 30 rigs in the Permian at the end of the second quarter. I would anticipate we'll be in the range of 15, maybe 10 to 15 at the end of the year, and that really is just a short term to manage our current capital planning. Those rigs that we have in the Permian will be focused on that Poker Lake development. So what we're doing is we're concentrating, we're concentrating our developments in the Permian in that core activity in Poker Lake that we've talked about for the last two times, the last two Investor Days. I would tell you in terms of ongoing sustaining capital, I'm always reluctant in our business to put a number to that because as your portfolio changes and as you make divestments, it's not a number to lock in, and I'm really, really reluctant to put a number on that. I would tell you it's somewhat easier in the Chemicals and Downstream businesses. I mean I think an order of magnitude on sustaining capital in those businesses will be in the $2 billion to $4 billion range. But I think in the Upstream, it's more difficult to quantify in that way.

I understand this is tricky, and I appreciate at least framing the answer. Gosh, I'm going to go to Guyana, if I may, on my second question. You used an interesting term of phrase, there is a potential for a delay. And if I preface my question like this, our understanding is that the Payara hole is well ahead of schedule. [indiscernible] I believe in Indonesia right now, there or thereabouts. My understanding is also that Bayphase has not yet finished its review of the development. And although we do not yet have a government, everything seems to be ahead of schedule. So what exactly are you signaling on Payara in terms of the risk or the potential for delay?

Well, Doug, it's really very simple. Everything we and the partners can do to progress Payara on schedule, we are doing and we've done. I've said to our organization many times, we need to be ready to move as soon as the government is ready. And we are ready. We're ready to FID this project, but we need an approved development plan, and that approved development plan needs to come from the government. And all the work with Bayphase and on the development plan, that's been worked for a long, long time. Of course, we're waiting for a resolution, like everybody else, of the election. And I think you're very familiar with what's happened down there. There was a vote, there was the recount, and then there's been a series of legal actions that have taken place since that time. What we know is that all parties in Guyana want to progress this development. Of course, we're in regular contact with both President Granger and the APNU+AFC coalition, and we're also in discussions with the PPP and Jagdeo and Irfan Ali. And what we continue to stress to the government is that if the project does get delayed, it's a loss of value to the country, and they understand that. It's very, very clear the government understands that. It's very, very clear the Ministry of Energy understands that. It's very important that we get this development plan so that we can FID in the September timeframe. There are weather conditions that if you meet -- miss a certain window, it could result in a delay of some months, and that's what we're trying to work towards. I'm confident this will get resolved, but Doug, it's -- we need that approval of the development plan, and that's what governments have to do. And obviously, we'll work with them. And as I said, we're ready to go.

And thanks for the restatement on the dividend.

Yes, yes. And I appreciate it. Good to hear from you, Doug.

The first question I had was around the dividend. And I think, Neil, your comments there was -- this is an imperative for you guys to defend. Can you just talk about the business logic and the financial logic behind defending the dividend, especially in light of some of the dividend reductions we've seen and are likely to be upcoming from your competitors?

Yes. I mean we see it this way. And Neil, I'd tell you our capital allocation priorities, as I said in my prepared comments, they're unchanged, and I don't think you'd expect anything different. I always see the three legs of a stool. It's a commodity business, so you've got to invest in advantaged projects. You've got to invest in accretive projects. That's the way to sustain a strong foundation and to generate future cash flows. But of course, the business is cyclical. We know that. It's volatile. We all know that. That's the norm, and therefore, it's important to maintain a strong balance sheet, and that's what we've done for years. It enables us to sustain through the commodity cycle. It enabled us to work through this quarter. And that's really, really important. But third, we have a long history in this corporation of providing this reliable, and I would tell you, and as you know, growing dividend for 37 years. A large portion of our shareholder base, I mean, Stephen may correct me, but I think something like 70% of our shareholder base of retail investors.

That's correct.

And the investor sets come to view that dividend as a source of stability in their income, and that's something we take really, really seriously. So we manage this capital allocation priorities over a long term. But obviously, it's a balance. And obviously, we recognize the need to balance in the near term to respond to what we've seen in these market conditions and market environment. And that's why we've had the cuts in CapEx and OpEx, and that's why we took on more debt in the last four months to a level that we feel is appropriate to provide liquidity, given the uncertainties of the market. But as I said, we don't plan to take on any more debt. We're now developing plans that will enable us to maintain our capital allocation priorities over the near term, and that includes sustaining the dividend. And our plans contemplate a price environment that's consistent with third parties. Of course, we look at sensitivities on the upside and the downside of that, and we are aware of what those will be.

Great. And I'm sorry to keep on going back to the capital spending question. I did think that is an incremental point of disclosure, so I just want to clarify some things here. So Neil, are you saying that at the end of the year, your fourth-quarter annualized headline CapEx, not cash CapEx, will be $19 billion? And then can you just talk about the buckets where you could see some downside relative to the plan that you had outlined?

Yes. Yes. Well, you are correct. That is what I said. In the fourth quarter, we expect to be at an annual running rate of $19 billion. And what I said was, I expect, I anticipate we'll be lower than that $19 billion in 2021. Of course, we have an annual plan process. That's the way we work in this company. And we ultimately review that plan with our Board of Directors in November, and that will be finalized. And that's why I'm always saying I expect we will do that. We'll finalize the plan ultimately with the directors, and we'll communicate that to you at that time. I think in terms of where we're taking those cuts, clearly, the short cycle in the unconventional space is the way you can turn on capital and turn off capital relatively quickly. And so the quickest cuts and the largest cuts we've made, as we've discussed, has been in the unconventional space, not just in the Permian. I tell you it is across all the unconventional space, and that will continue. In the Downstream and Chemical projects, it's really a question of deferral. So we're not stopping any of these projects. We're deferring them. We're postponing them. And we're working with our partners, and we're working with EPC contractors, and we're working with local authorities. And that is why we've not been specific at this stage which project we're deferring over what period and when. When we have clarity with all of our partners, of course, we will share that with you.

Neil, economic value-added or EVA for ExxonMobil, and really every super major peer has declined steadily during the past decade or so even though we've had a range of commodity prices and margins. And we're now seeing the stocks of the super majors falling to 3- and 4-decade lows versus S&P 500. And on this point, one read could be that companies are investing cyclically or countercyclically, which I think is you all's view despite secular deteriorating -- or deterioration in competitive conditions that is a decline in value creation that we've seen. So two questions. First question is, how do you think about the secular/cyclical risk part and the implications for spending? And then second, with ExxonMobil stock at a 40-year low versus S&P 500, why wouldn't this argue for additional transformation of the company's business structure, financial metrics, executive pay incentives, or whatever you think is important? Or do you think that the current plan is sufficient and it will eventually accomplish the objective? So what's the market missing here?

We can discuss this for a long time, Doug. So I'll try and be succinct. Look, in terms of how do we think about this business, we don't think the long term has changed. It is a cyclical business. The fundamentals are not -- have not changed. The population will continue to grow. Economies will continue to grow. This relationship between societal progress or you can describe it as human development and energy consumption is absolutely clear, and the demand for energy by all third parties is going to be up 25% by 2040. So we don't see that's changed. And in our business, of course, which is a depletion business, it's not just a question of the growth in demand. It's the depletion as well, which, as you know, demand for crude oil -- and again, I apologize, I don't know these numbers exactly right. It's about 0.7% annual growth, and gas is probably 1.3%, but the depletion is about 6%. So there is a need for hydrocarbons to come into the market and people to invest in hydrocarbons to meet that energy demand. And the winner, the winner will be the company with the strongest portfolio and the company with the strongest operating results. And that's what we've been discussing at our last, however many, three investor meetings. And of course, we've talked about and be very, very quick, we've got the strongest set of development opportunities in the Upstream, and we've got the most -- we've got one of the most aggressive divestment programs, and we're driving costs out of the business. In the Downstream, we're not focused on growing fuels, we're focused on upgrading fuels, basically to distillate with diesel jet fuel and base stocks to meet that market demand. And of course, in Chemicals, chemical demand, which is growing fast, is driven by this growth in the middle class, and we feel very well positioned in that business. So I don't see anything changing. There's no evidence that anything is changing to any of that. I mean that is for sure. In terms of what do we need to do and should we be doing more, I would tell you, Doug, that's what we're focused on. You only win in this commodity business if you have the lowest cost structure, and driving costs out of your business and upgrading your portfolio is what this business is all about.

I guess, Neil, the comment I'd add, as we did the restructuring in the two businesses along the value chain construct, what we're able to really identify is the overall cost of delivery of our products. And we're identifying efficiencies across those -- that entire value chain at a rate far higher than we really anticipated, and that's where we're going to start to see additional efficiencies going forward.

Yes. Yes, Stephen is right, Doug. And I would tell you that this evaluation that we're going through as part of this year's plan to set up our cost structure for future years, '21 and beyond, we are looking at very significant efficiencies and lower operating expenses. And I know you're going to ask me, 'Okay, what is the number?' That is part of our planned process. So we'll share with you at the end of the -- you know what I'm going to say, Doug. But as I said in my comments, we do see the potential for further workforce reductions, including overhead and management positions, but we'll look at that reductions by function, by business, by country, and that will be the basis. We will conclude those plans during the summer months, and we'll review that with the Board in November.

Okay. So it sounds like we'll hear about kind of an updated plan for potential or normalized earnings that you've provided in the past maybe next spring. Is that a good way to think about it?

Yes, that would be our intent. Yes, that's exactly right. Exactly right.

Can you hear me?

Yes, sure.

I'd like to maybe come at the CapEx question a little different way. Bear with me a second. But as we think about what happened in the post-2014 CapEx cuts, we saw a tremendous amount of improvement in productivity and efficiency and cost reductions just from your contractor/subcontractor universe. Doesn't look like there's the same level of cost cuts that come out on that particular part. So as I think about a CapEx cut from the roughly $30 billion to the sub-$20 billion range, you've mentioned deferrals, but are we going to see a more significant impact on whether it's Exxon or the industry in terms of the ability to bring new oil and gas projects to market as maybe the main result here? I guess what I'm trying to think of is, is this one going to have -- this particular downturn going to have a bigger impact on the industry's deliverability? You kind of touched on that on the intro beyond, just interested in getting your thoughts on that.

Yes. Well, I think, look, it is -- when you look across the industry, and we read the same reports that you do, and there's been a dramatic cutback in our industry on capital expenditure. And history says there is a result of that. This is a depletion business. I mean we all know what happens when you don't invest in this business, it certainly suggests that will be the case this time around. But obviously, I can only really talk about what we are doing and why. We're taking these short-term steps while preserving the long-term value. That is our objective. I would tell you that we are working very hard with the contractors, the material suppliers on every angle to drive further efficiencies and costs out. The contracting industry is hungry because there's been so much CapEx taken out of the business, and people have suspended and postponed so many projects. So we're working very, very hard. And I have to tell you, in the Downstream, Chemicals, and Upstream, I am -- well, first of all, I'm really pleased how well the EPC contractors are working with us. It is a great -- it illustrates the great partnership we have with them. And jointly, we're taking efficiencies, and we're offsetting the cost of these deferrals with increased efficiencies. That's what I am seeing, and that's what we're seeing in the business. In terms of ability, where the industry stops investing, will that impact the long term of the ability to step up and reinvest again? There's always that chance. But experience in a commodity business suggests that when the demand is there, the market will deliver. I don't see any difference here. I am very optimistic, though, that as a result of not just the oil crash in '15, '16, but what we've seen today will fundamentally, will fundamentally push this industry to do things more efficiently and take structural costs out of construction in a way that we have not previously seen.

Okay. So that's all...

I don't know if that answered your question, Roger.

I think so. I mean it's always amazing to me just how much productivity and efficiency comes out of the industry whichever the cycle, but especially in these down cycle moments.

Yes. And I would tell you, as a business owner, Roger, it's unbelievably frustrating, right? Because we should gain these efficiencies in the base case. So -- but I agree with you. When times get like this, then it's extraordinary how the industry can find opportunities to do things more efficiently and take more cost out. Sorry, I interrupted your second question.

No, no, that's quite all right. Second question, shifting gears a little bit back to Guyana that Doug mentioned earlier. Between your partner having their call in this call today in a nearby country, there was another discovery in the deeper zones. Your partner talked about some of the deeper zones. I was just wondering how are you looking at that opportunity and how that fits within the sort of greater than $8 billion of discovered resource so far? Where does it fit in the overall package? What did the Yellowtail-2 really tell you about that and some of the other opportunities?

Yes. Well, I think you're probably aware, our latest appraisal well, which was on a prospect we call Yellowtail-2 and we discovered two. I would tell you that additional high-quality hydrocarbon-bearing reservoirs, and that it's very positive for us, and it's very positive for the country and our partners. One was adjacent to Yellowtail and one was below Yellowtail. So that further gives us great confidence and it's more learnings in terms of the potential at lower depths or deeper depths. We're now on a prospect called Redtail. I would anticipate we'll get some initial results in August on Redtail. We're going to move into the Kaieteur Block in August on a prospect called Canje. And of course, subsequent to that, we've got other exploration projects that we're drilling up in later this year, one in Hassa-1 and one in Bulletwood, which is on the Canje Block. If my memory is correct, those are what we're doing. In terms of Suriname, I think you're aware, we're in Block 59 down there, and we're in Block 52 with our partner, Petronas. And we're looking to drill a well on Block 52 with our partner potentially in the fourth quarter of this year. I think the learnings and the understanding of the whole resource base in those offshore areas, Suriname and Guyana, the more we find and the more we drill, the more we understand about that whole prospects. But I would tell you that everything we've seen this year is consistent with what we've been talking about. And we are very encouraged and very excited by the prospects going forward.

So belabor the CapEx topic, but something that I think we landed on that's pretty important, especially for investors. In the past, the process of budgeting CapEx was never explicitly tied to your expected sources of cash. And actually, as a matter of fact, the management committee would make it very clear that they were completely decoupled all the time and that just wasn't the right way to run the business. And so I mean do you think it's a fair interpretation of your comments to say that there's a real fundamental change in the way [indiscernible] and that the sort of cash include disposals and other nonoperating factors are now a prominent part of that process, and we should think about it that way? Or is this just a unique circumstance to the moment?

No, I don't think it's a fair way of characterizing it. I mean in the short term, we have elected to do the following. We've elected to take no more debt on because we want to protect the strength of our balance sheet. We want to and we feel a great commitment to our dividend. And so what other knob do you turn when you're in that situation? It's capital expenditure. I see this as a short-term reduction in capital expenditure to manage the current situation. We retain a very competitive balance sheet. I mean you know that. You've seen this. It's very competitive versus our peers, and we want to protect that, and so we're doing that by taking shortcuts and expenses. It doesn't change our fundamental belief that you need a strong balance sheet and you need to invest in the most attractive prospects, the most competitive prospects that are out there. So again, Sam, I don't think it's a fundamental change. I think it's a response to the short-term environment.

Okay. And I apologize for belaboring that. I just wanted to clarify. And then on a related note, within this process of high grading for the near term, the focus is to be on Permian, and it seems like the LNG projects may have [indiscernible] LNG sort of tied to some other goals for the company [indiscernible].

Yes. Yes, Sam, we kind of lost you there, but I'm going to say -- I'm going to try and interpret what I heard. It was around LNG and the LNG projects, and you're aware that we have two significant opportunities in Mozambique and in Papua New Guinea. I think we're continuing in Papua New Guinea to work with the government on the P'nyang fiscals, and that process is ongoing. We're continuing to work with our partners in Mozambique, both the government and our partners on the timing. I think consistent with what you see in our capital spending and consistent with what you see across the industry, there could be a time component in terms of a delay. You will recall that both those two projects, even in 2018, we were talking about them coming online in the '25 -- 2025 type of period. There is a chance that will slip a few years or a little bit of time beyond that. Yes. Sorry, Sam, we lost it. If that wasn't the question you were looking for, that's what I heard.

I guess I'm going to also -- I'm going to ask another follow-up, I suppose, on this topic. But as we look at the current cash balances for the company and your CapEx plans, is there a minimum level of cash that you're, I guess, basing your commentary on that you would not plan to be adding additional debt? And is there anything in there or inorganically and plan around asset sales? Or is that commentary completely organic in nature? And I guess the bigger picture question is, you're talking a lot about efficiency improvements and lowering costs. So structurally, the $30 billion to $35 billion in CapEx you've talked about, is that something that through efficiency gains and things you believe actually would be lower in the future?

Yes. Let me try and address them in order. Asset sales, I mean, but it's not the best environment for selling assets, but I can assure you that we are in the market with multiple assets, and we're progressing asset sales. Whether they will finalize or come to fruition, time will tell. But I think it all depends on what you're selling, what market, what location, what's the age of the asset, et cetera. And so we are extremely active in that space. But I never like to try and predict what will happen in the future of that because it depends on both the buyer and the seller. So -- but we're still progressing. In terms of cost savings, as I mentioned earlier on and how that impacts CapEx, I'm optimistic that when times get really tough for everybody in that supply chain of project development and project execution, you identify and drive new efficiencies. So you would hope that they can be retained, and you would hope -- and we certainly plan that we'll benefit from those in the long term. Will it change our capital expenditure from $33 billion, which was our original plan for this year, down to $23 million just through savings? I think that's probably a little bit optimistic, frankly. But we do see savings coming out, and we do see savings coming for the long term.

I guess, Neil, it will also depend on what's the business environment look like, and that's the beauty of the Permian. We'll be able to flex up or down depending on what we see in terms of the market.

Yes. Yes. And I would tell you, as a business owner, Roger, it's unbelievably frustrating, right? Because we should gain these efficiencies in the base case. So -- but I agree with you. When times get like this, then it's extraordinary how the industry can find opportunities to do things more efficiently and take more cost out. Sorry, I interrupted your second question.

No, no, that's quite all right. Second question, shifting gears a little bit back to Guyana that Doug mentioned earlier. Between your partner having their call in this call today in a nearby country, there was another discovery in the deeper zones. Your partner talked about some of the deeper zones. I was just wondering how are you looking at that opportunity and how that fits within the sort of greater than $8 billion of discovered resource so far? Where does it fit in the overall package? What did the Yellowtail-2 really tell you about that and some of the other opportunities?

Yes. Well, I think you're probably aware, our latest appraisal well, which was on a prospect we call Yellowtail-2 and we discovered two. I would tell you that additional high-quality hydrocarbon-bearing reservoirs, and that it's very positive for us, and it's very positive for the country and our partners. One was adjacent to Yellowtail and one was below Yellowtail. So that further gives us great confidence and it's more learnings in terms of the potential at lower depths or deeper depths. We're now on a prospect called Redtail. I would anticipate we'll get some initial results in August on Redtail. We're going to move into the Kaieteur Block in August on a prospect called Canje. And of course, subsequent to that, we've got other exploration projects that we're drilling up in later this year, one in Hassa-1 and one in Bulletwood, which is on the Canje Block. If my memory is correct, those are what we're doing. In terms of Suriname, I think you're aware, we're in Block 59 down there, and we're in Block 52 with our partner, Petronas. And we're looking to drill a well on Block 52 with our partner potentially in the fourth quarter of this year. I think the learnings and the understanding of the whole resource base in those offshore areas, Suriname and Guyana, the more we find and the more we drill, the more we understand about that whole prospects. But I would tell you that everything we've seen this year is consistent with what we've been talking about. And we are very encouraged and very excited by the prospects going forward.

So belabor the CapEx topic, but something that I think we landed on that's pretty important, especially for investors. In the past, the process of budgeting CapEx was never explicitly tied to your expected sources of cash. And actually, as a matter of fact, the management committee would make it very clear that they were completely decoupled all the time and that just wasn't the right way to run the business. And so I mean do you think it's a fair interpretation of your comments to say that there's a real fundamental change in the way [indiscernible] and that the sort of cash include disposals and other nonoperating factors are now a prominent part of that process, and we should think about it that way? Or is this just a unique circumstance to the moment?

No, I don't think it's a fair way of characterizing it. I mean in the short term, we have elected to do the following. We've elected to take no more debt on because we want to protect the strength of our balance sheet. We want to and we feel a great commitment to our dividend. And so what other knob do you turn when you're in that situation? It's capital expenditure. I see this as a short-term reduction in capital expenditure to manage the current situation. We retain a very competitive balance sheet. I mean you know that. You've seen this. It's very competitive versus our peers, and we want to protect that, and so we're doing that by taking shortcuts and expenses. It doesn't change our fundamental belief that you need a strong balance sheet and you need to invest in the most attractive prospects, the most competitive prospects that are out there. So again, Sam, I don't think it's a fundamental change. I think it's a response to the short-term environment.