Exxon Mobil Corp (XOM) — Q4 2020 Earnings Call Transcript

Thank you, and good morning, everyone. Welcome to our fourth quarter earnings call. We appreciate your participation and continued interest in Exxon Mobil. I am Stephen Littleton, Vice President of Investor Relations. Before getting started, I hope all of you on the call, your families and your colleagues are safe in light of the continuing challenges we face as a result of the coronavirus pandemic. I’m pleased to welcome Darren Woods, Chairman of the Board and Chief Executive Officer of Exxon Mobil, who will be joining me for the call today. After I cover the quarterly financial and operational results, Dan will provide his perspectives on 2020 and updates on our priorities and plans for 2021 and beyond. Following those remarks, Darren and I’ll be happy to address questions. 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 developments since the third quarter of this year on the next slide. In the Upstream, gas realizations increased by approximately 40%, with demand and prices recovering from lows earlier in 2020, reflecting the impact of supply disruptions, colder weather and crude-linked LNG pricing. Liquids realizations were essentially flat with the third quarter, with low October prices improving as the quarter progressed. While there were no economic curtailments in the quarter, government-mandated curtailments increased to approximately 190,000 oil equivalent barrels per day. Despite considerable challenges associated with the pandemic, the Upstream business matched its best ever reliability performance for the year. We continue to progress active exploration programs in Guyana and Brazil. And in the fourth quarter, we announced a hydrocarbon discovery in Suriname, which extends Exxon Mobil’s resource position in South America. In the Downstream, we achieved the best-ever personnel and process safety, as well as record reliability performance for the year. Industry refining margins remained at historic lows, driving industry rationalization with four times the 10-year average level of capacity reductions announced in 2020. With continuing weak margins, we expect further industry closures. The Chemical business matched the strong operational performance of the Upstream and Downstream, also achieving best-ever annual safety and reliability performance. This excellent performance enabled us to fully capture the improving margins, driven by sustained strength in packaging and continued recovery in automotive and global product markets. Across the corporation, we exceeded the operating cost and CapEx reduction targets that we laid out in April. We decisively responded to the unprecedented market conditions in 2020. Leveraging our global projects organization, we were able to defer spend and optimize projects to preserve the long-term value of our industry-leading investment portfolio. Let’s move to Slide 4 for an overview of fourth quarter results. The table on the left provides a view of fourth quarter results relative to the third quarter. Starting with third quarter 2020, the reported loss of $700 million included favorable identified items of a $100 million, driven by the non-cash inventory adjustments we noted in the third quarter. Excluding these items, the third quarter loss was $800 million. Fourth quarter results were a loss of $20.1 billion, including $20.2 billion of identified items related to impairments. Earnings, excluding identified items, were $100 million, a $900 million improvement from the third quarter. Fourth quarter results were $200 million lower than the third quarter due to mark-to-market impacts on unsettled derivatives. This reflects the impact of marking-to-market open financial derivatives for which the physical trading strategy has not closed at the end of the quarter. We expect to realize the full earnings of these trading strategies when they close in the future. Improvements in upstream, natural gas and LNG prices as well as increased liquids production in Guyana also benefited earnings. Continued strong demand for high-value chemical performance products, coupled with the strong reliability, supported chemical earnings improvement of $200 million. Finally, as a result of the growing trend of our portfolio, we removed less strategic assets from our development plans, including certain dry gas resources, notably in North America. This resulted in a non-cash after-tax impairment charge of about $19 billion. On the next slides, I will cover a brief summary of quarterly results. I will focus my comments on the underlying business performance, excluding identified items. Moving to Slide 5. Improved prices and margins in the Upstream and Chemical increased earnings by $530 million. The benefit of higher Upstream liquids production in Guyana, Canada, and the U.S. also improved earnings. This was offset by higher expenses due to the timing of planned turnaround, maintenance and the exploration activity. In the Downstream and Chemical, our integrated manufacturing sites allowed us to rapidly respond to dynamic market conditions and capture significant feedstock benefits. For example, we optimized units that typically produce gasoline to increase production of high-value chemical feedstocks, critical to the manufacturing of gowns, masks and hand sanitizer. Manufacturing results in the Downstream were improved with stronger liability and investments that high-grade product yields contributing $160 million to the fourth quarter earnings. On the next slides I will cover a brief summary of the full-year results. Slide 6 is a comparison of full-year 2020 results relative to 2019. Results reflected the unprecedented loss in demand driven by the economic impact of COVID, which in turn significantly depressed Upstream and Downstream margins. In responding to pandemic-related challenges, the organization rapidly reduced costs, achieving $3 billion in structural savings out of a total reduction of $8 billion. Our manufacturing facilities contributed an additional $1 billion with better reliability and improved product yields. Moving to Upstream volumes on Slide 7. Upstream volumes decreased by an average of approximately 190,000 oil equivalent barrels per day compared to 2019. Volumes were impacted by economic and government-mandated curtailments, as well as Groningen production limits, which in total reduced volumes by approximately 210,000 oil equivalent barrels per day. Excluding the impact of economic and government-mandated curtailments, entitlements, Groningen production limits and divestments, volumes increased by about 110,000 oil equivalent barrels per day. This was in line with our original production plans with optimization of maintenance activity reducing the impact of economic curtailments. Moving to Slide 8. In April, we set a target to reduce 2020 cash operating expenses by 15% and CapEx by 30%. We exceeded these reduction targets. Looking at capital spending, we established reductions of 30%, the reorganization of our Upstream and Downstream businesses a couple of years ago enabled us acceleration of the efficiency capture that we expected from these changes. Cash operating expenses were down $8 billion versus 2019, including structural reductions of about $3 billion that were delivered through optimization of supply chains and logistics, work process simplification and workforce reductions. We leveraged our new global product organization and strong relationships with EPCs to adjust our capital plan, deferring spend and further optimizing projects. This allowed us to reduce quarterly spend by $2 billion in the second quarter versus the first quarter, a 25% reduction. As we continued this work through the year, we reduced capital expenditures by $10 billion or greater than 30% versus 2019 in the original plan. Importantly, we view this while improving safety, reliability, and the environmental performance of our operation. Let’s turn to the next page, where you can see the impact of these reductions on our cash profile. Excluding the impact of working capital affects, fourth quarter cash flow from operating activities was up $600 million from the third quarter. Gross debt decreased by about $1.2 billion to $67.6 billion. We ended the quarter with $4.4 billion of cash, a little above our minimum operating levels. Turning to Slide 10, I’ll cover a few key considerations for the first quarter. In the Upstream, government mandate curtailments are expected to average 150,000 oil equivalent barrels in the quarter, a decrease of approximately 40,000 oil equivalent barrels from the fourth quarter. Production is expected to be higher in the first quarter due to seasonal gas demand. In the Downstream, we anticipate higher scheduled maintenance in terminals to be offset by additional efficiencies. In Chemical, we anticipate continued demand resilience across packaging, hygiene, and medical segments with continuing recovery in automotive and construction markets. Scheduled maintenance is expected to be in line with the third quarter. Corporate and finance expenses are anticipated to be about $700 million. Lastly, at current crude prices in Downstream and Chemical margins, we expect cash flow from operating activities to cover the dividend and our planned CapEx, which has flexibility to adjust depending on the business environment. With that, I’ll now turn the call over to Darren.

Thank you, Stephen. Good morning. It’s good to be on the call. I hope you and your families are safe and healthy. I’m sure I’m like many of you happy to close the book on 2020 and optimistic for the year ahead. As you know, the pandemic has had devastating impacts on people and businesses around the world. These effects were especially severe in our industry. And as your consumption collapsed as economies shut down, oil prices hit their lowest point in history and refining margins fell well below their 10-year lows. It was the first time in memory that we saw simultaneous lows in each of our businesses. As I discussed a year ago, our response throughout these challenging times was primarily focused on three areas: protecting the health and safety of our employees and communities, keeping our operations running to support COVID response efforts, providing critical energy and products, and aggressively reducing spend while preserving value to ensure we remained in the best possible position for the eventual recovery. We’re pleased with how we performed on each of these. Our employees stepped up and made contributions to those in need of our products from hand sanitizer, especially products for protective equipment to fuel for first responders. Through extraordinary efforts, we kept operations running 24x7 while achieving strong safety results and exceptional reliability performance. At the same time, we leveraged the ongoing work in reorganizing our Upstream and Downstream businesses to significantly reduce costs and preserve value in an extremely challenging and uncertain market environment. We delivered on our cost reduction objectives and outperformed our revised plan, which we shared even in April. Going forward, we’re continuing to work to reduce costs by leveraging synergies from aligned organizations and work processes across the Upstream, Downstream and Chemical. Further opportunities are being identified to reduce costs to drive cash flow and maintain our capital allocation priorities, including paying a strong dividend and maintaining a fortified balance sheet that we deleverage over time. I’ll provide more detail momentarily on the successful efforts to drive greater efficiency across our businesses and further improve our cost structure. I’ll also spend time discussing the significant steps we’ve taken to reduce emissions intensity and absolute emissions and our work to advance lower emission technologies like our newly announced Low Carbon Solutions business. Collectively, this will help position us as an industry leader in greenhouse gas performance while helping society move to a lower carbon future. Let me start though by highlighting a few notable achievements from 2020 and what was a very difficult business environment. During a year of unprecedented challenges, our people successfully managed our global operations, ensuring the uninterrupted supply of essential energy and products while achieving best ever safety and reliability performance. We reduced cash operating expenses by more than 15%, including $3 billion of structural improvements and reduced capital expenditures by more than 30% to $21 billion, without compromising the advantages or value of our projects. We achieved our 2020 emission reduction goals for both methane and flaring and established new plans for 2025 that are projected to be consistent with the goals of the Paris agreement. These plans are expected to reduce absolute Upstream greenhouse gas emissions by 30%. Permian basin volumes exceeded our plan at 370,000 oil equivalent barrels per day, despite curtailments and reduced investment. This performance was driven by significant ongoing improvements in operating efficiencies and technology development. We progressed Liza Phase 2 and Payara developments in Guyana and continued our exploration success with three new discoveries, increasing the recoverable resource estimate on the Stabroek Block to nearly 9 billion oil equivalent barrels. Our Chemical business set a new record for polyethylene sales, reflecting the growth and demand for performance packaging, and strong operating performance of our expanding asset fleet. We maintained our position as a global leader in carbon capture, one we’ve held for more than 30 years by increasing sequestered CO2 to more than 120 million tonnes. This is well over twice the next closest competitor and larger than the next five competitors combined. To put this into perspective, 122 million tonnes is equivalent to taking more than 25 million passenger vehicles off the road in a year. In 2020, we focused on managing through the impacts of an unprecedented industry environment, leveraging the strengths of our corporation to progress an industry-leading portfolio of advantaged investment opportunities, critical to the long-term success of the company. At the same time, we drove deep structural efficiencies to improve competitiveness and position ourselves among the industry’s lowest cost of supply. Let me start with our efficiencies. You may recall that in 2019, we completed our corporate reorganizations, moving from functional companies to businesses organized along the value chains. This allowed us to reduce overhead and provided end-to-end oversight for each business, which was a critical first step in streamlining the businesses to structurally reduce cost. It also allowed us to more effectively prioritize work and focus on the highest value activities. Consistent organizations across each sector are allowing us to consolidate like activities to fully leverage the corporation's scale, further reducing costs and improving effectiveness. Our global projects organization was established in 2019 as a result of this approach. This organization has played a critical role in reoptimizing our global investment portfolio, improving the capital efficiency of each object and when necessary, cost-effectively deferring work. As we came into 2020 and the pandemic, the organization changes provided the foundation for significantly reducing spend across the businesses. Expense results are shown in this chart, which is consistent with the charts Stephen showed, excluding production in taxes and energy expenses that are a function of commodity price. As you can see, 60% of the $5 billion reduction from 2019 to 2020 was structural, driven by reduced overheads and operational efficiencies. The remaining reductions were temporary, driven by lower production and activity deferrals. During last year’s planning process, each organization identified opportunities to convert the short-term or temporary expense reductions into permanent structural efficiencies. This year, we expect to achieve a further $1 billion of structural efficiencies. By 2023, we will achieve a total of $6 billion in structural expense reductions versus 2019. I expect even further reductions as we take advantage of additional synergies unlocked by consistently organized businesses. One final point to make on this Slide. The structural reductions we’ve shown are independent of the price environment we find ourselves in. And on the other hand, returning activity and increased expenses between 2020 and 2023 are in large part, a function of the price environment. In lower price environments, much of that increase would be further deferred. Let me now turn to another critical area, our capital investments. Over the past several years, we have been progressing a strategy to high-grade our asset base and improve the earnings and cash generation potential of our businesses. We announced work to invest less strategic assets and have been progressing a portfolio of industry-leading investments. With pandemic-driven losses, we responded quickly to bring capital spending in line with market conditions and an uncertain outlook and preserve our strong dividend. As we entered 2021, our capital plan is at a historic low, significantly reduced from 2020 levels. Our capital plans through 2025 reflected three key themes: value, flexibility, and discipline. Value derived from advancing our highest return, cash flow creative projects to deliver increased earnings and cash both near and long-term. Flexibility to respond to a dynamic market. We demonstrated this in 2020 and have developed our plans with this in mind. And discipline to make adjustments to our capital program depending on market conditions to support a strong dividend and begin to deliver. Our plans are built on a price basis consistent with third-party outlooks and advance our highest return investments. They maintain a healthy balance sheet and our strong dividend. They’re robust to a wide range of price scenarios and using last year’s experience and flexibility to respond to lower price environments. In each plan year, we have a level of short-cycle unconventional spend, which can be reduced in line with market conditions. We also expect to restart projects that have been suspended across this time horizon, but if necessary, can be delayed longer, further deferring spend. We also have a level of early investments that fund long-term growth opportunities. These two can be deferred or suspended. While each of these reductions impacts the value of our plan, they are available as circumstances warrant. Less flexible spend can also be reduced, but at a higher cost. This capital is generally longer cycle, more firmly committed or very near completion. The next slide helps quantify our capital flexibility. On the left of this graphic, we show available cash from operations for our 2021 plan at different rent prices, assuming the lowest refining and chemical margins experienced from 2010 to 2019. This is our source with higher crew prices generating more available cash. As you move right, you see our uses, the current dividend and our 2021 CapEx from the previous page. As you can see, the breakeven Brent price needed to pay our dividend and invest in the low end of our flexible capital is roughly $45 a barrel. The Brent price required for 16 billion, which is the low end of our guidance and closer to where I expect our actual spend to be in 2021, is $50 a barrel. With Downstream and Chemical margins at the bottom of the 10-year historical range, we can fund our highest return investments in Guyana, the Permian in the Chemical business, and begin paying down debt at Brent prices, just above $50 a barrel. If Downstream and Chemical margins were at their 10-year averages, Brent breakeven prices would be roughly $5 a barrel lower, which would allow us to fund investments, pay the dividend and pay down debt at Brent prices above $45 a barrel. As we look at the market year-to-date actual prices in margins in total are above our plan, allowing us to progress our investments, pay the dividend and begin paying down debt in the first quarter. Obviously, we’re very early into the year and we know the market will change. We’re keeping a close eye on developments and we’ll adjust our capital spend accordingly, protecting the strong dividend and preserving the balance sheet. Let’s shift to a later year in our plan, 2025. By 2025, we expect Downstream and Chemical margins to be off their lows and closer to a long-term average. In this case, we used the average margins for 2010 to 2019. In addition, we will see the full benefits of the structural OpEx improvements and additional cash from the projects that come online by 2025. As you can see, there is significantly more flexibility in our capital spend. As a result, our plans continue to cover the dividend and capital investments at Brent prices as low as $35 a barrel. At Brent prices above $50 a barrel, our capital allocation framework supports our planned investments, further debt reduction and/or shareholder distributions. So as you can see, our plans were robust to a wide range of price environments, and while we are optimistic that the recent improvements in the macro environment will continue, we recognize that much could change over the next four to five years. If we face a year where Brent prices remain below $50 a barrel on a sustained basis, we would reduce investments to levels more consistent with this year’s plan. Recognizing the market uncertainty we’ve attempted to strike the right balance between maintaining a strong dividend, fortifying the balance sheet to delever and continuing to invest in high return cash accretive projects. This last point is critical, particularly in a depletion business. The next chart gives a good perspective of this. Our investment strategy is focused on growing earnings and cash flow across a wide range of market environments. We are investing in advantage projects with some of the industry’s lowest cost of supply. They grow earnings and cash flow in a variety of market environments. This graphic helps to illustrate this. Using IHS crude price and third-party margins, we expect the cash flow from project startups over our investment horizon to represent roughly 40% of our operating cash flow in 2025. This makes a critical point. You pay a significant long-term cost for excessive short-term investment reductions. And industry does it collectively; the market pays with much higher commodity prices, striking the right balance, responding to short-term constraints with an eye on the mid to long-term generates the greatest value. Of course, an investment portfolio of industry advantage projects is critical. The next slide provides a perspective of the investments we are making in developing Upstream resources, which represents the majority of our Upstream capital spend. This chart graphs cumulative Upstream capital spend to develop resources from 2021 through 2025 against the Brent price required for the investment to generate a 10% return, which we’ve deemed our cost of supply. As you can see, our focus on high return, lowest cost of supply investments, generates a portfolio with a cost of supply well below $3 a barrel. In fact, almost 90% of our investments in developing Upstream resources have a cost of supply of $35 per barrel or less. These investments generate an average return using third-party price outlooks in excess of 30%. So as you can see, striking the right balance, progressing a very attractive portfolio of investments or maintaining our strong dividend in fortifying the balance sheet to delever is essential to maximizing value, both near term and long term. When executed in a period where others are pulling back and construction markets are slack, these investments become even more attractive. When you factor in the flexibility of our short-cycle investments in the Permian where the value proposition continues to grow, we are well positioned. We have an attractive investment portfolio that we can flex with market conditions to strike the right balance across our capital allocation priorities. Let me now take a few minutes to highlight the progress we’ve been making in the Permian. Despite challenging conditions and a rapid change in activity, our progress in the Permian exceeded our plan and its expectations. These improvements reflect the hard work of our people, the organizational changes made in 2019 and the continued evolution of our technology and techniques. In 2019, we better integrated the experience of our global drilling, technology and project organizations with the unconventional operating organization. Working together, they made a step change in performance that continues to improve. 2020 drilling rates were 50% better than our planned and more than 20% better than full year 2019 results. Drilling and completion costs were 15% below our plan and more than 25% lower than 2019 results. We estimate that roughly two thirds of the savings were due to improved performance. As an example, the number of frac stages achieved in a day increased by 30% versus 2019. As we enter 2021, we continue to see progress in our key performance metrics, further growing the value of this resource and improving upon our plans. In 2020, capital expenditures in the Permian were 35% below plan. Despite significant economic curtailments in the second quarter, 2020 volumes of 370,000 oil equivalent barrels per day exceeded our plan, about 100,000 oil equivalent barrels per day, above 2019. Going forward, with the pandemic-related impacts on our balance sheet and market outlook, we are pacing Permian investments to maintain positive free cash flow, deleverage industry-leading capital efficiency and achieve double-digit returns at less than $35 a barrel. Based on the current market price projections, our plans result in Permian volumes of approximately 700,000 oil equivalent barrels per day by 2025. If demand and prices are lower than current third-party outlooks, we’ll adjust our plans. At a nominal Brent price of $50 a barrel through 2025, we would expect to deliver an additional 100,000 oil equivalent barrels per day in 2025 versus 2020 production levels. The key point here is that we have flexibility in options, which I expect to improve with time. We’ve been making significant progress in our technology programs, which are contributing to current performance. With the advances we are making, I expect continued improvements in productivity, growing volumes at even lower cost. Hopefully, the Permian discussion and broader overview of our investment plans provided a useful perspective on the opportunities we have and the balance we are attempting to strike across our capital allocation priorities, amid an uncertain market outlook. I’d like to move on to the results we’ve achieved in lowering our emissions and the plans we have for further reductions, but before I do, I’d like to recap some key points. Our portfolio offers the best collection of investment opportunities we’ve had in over 20 years. We have some of the industry’s lowest cost of supply projects with strong returns that are robust to low prices. Coupled with our expense efficiencies, our capital program through 2025 improves the earnings power and cash generation potential of our asset base in both the near and long-term. Leveraging our experience from 2020, we’ve built flexible plans that will allow us to adjust to market developments and potentially lower prices. If prices move higher than our plan basis, this will allow us to more quickly replenish our balance sheet. Our plans strike the right balance, growing value, maintaining strong dividends and a fortified balance sheet that is deleveraged over time. Let’s turn to our work and position the company for a lower carbon energy future. Addressing the risk of climate change is one of society’s biggest challenges, requiring the combined effort and collaboration of governments, academia, businesses and consumers. ExxonMobil has spent decades researching new technologies and deploying existing ones to lower our emissions and the emissions of our customers. Today, we remain committed to this. We plan to position ExxonMobil as a leader in our industry. Since its inception, we have supported the goals of the Paris Agreement, engaging in climate-related policies and supporting a tax on carbon. Since 2016, the year of the Paris Agreement, we’ve reduced our operating greenhouse gas emissions by 6%. Last year, we met the reduction objectives we set in 2018. And in the fourth quarter announced new emission reduction plans for 2025 that are consistent with the goals of Paris. Our plan to reduce emissions from operated assets and align the company with the World Bank’s initiative to eliminate routine flaring. To reduce the intensity of our operating upstream greenhouse gas emissions, we drive a decrease in methane intensity and a decrease in flaring intensity. This is expected to reduce absolute upstream greenhouse gas emissions by an estimated 30% and absolute methane and flaring emissions by 40% to 50% versus 2016 levels. Our plans continue to invest in lower emissions initiatives, with an expectation to spend up more than $500 million a year. This includes energy efficiency, TCS investments, cogeneration, research and development and renewable purchases, an area where we already make a significant contribution. Today, we are the second largest buyer of wind and solar power in the oil and gas industry and among the top 5% across all corporations, purchasing roughly 600 megawatts. While we don’t bring a significant competitive advantage to many wind and solar projects, we can leverage our size to support world-scale developments with purchase contracts hoping to ensure they are built. We’re also the world’s leader in carbon capture, responsible for over 40% of the CO2 captured. To put this into context, the nature conservatory announced a campaign in 2008 to plant a billion trees. Our cumulative CO2 capture is more than double that goal. We’re also one of the world’s largest producers of hydrogen. As the potential for this and the energy transition develops, we are well-positioned to leverage our experience, scale and technology to contribute. In fact, to ensure that we effectively leverage all of our technologies, experiences and expertise, yesterday we announced the formation of a new business, ExxonMobil Low Carbon Solutions. This business will focus on advancing commercial CCS opportunities and deploying emerging technologies as they mature. I’ll come back to our plans for this in a moment as we expect it to underpin our long-term strategy in driving emission reductions. I want to first focus on the progress we’ve already made. As you can see in this chart, since the inception of the Paris Agreement, ExxonMobil has made significant progress in reducing our greenhouse gas emissions, down 6% significantly outpacing the progress made by society as a whole. Over the past 20 years, we have invested more than $10 billion to research, develop and deploy lower emissions energy solutions, resulting in highly efficient operations. During that time, we eliminated or avoided about 480 million tons of CO2 emissions, which is equivalent to the annual emissions of 100 million cars. The plans we announced in December further reduce the intensity of our businesses, delivering an expected reduction in emissions of roughly 12% by 2025. I want to pause here for a minute and emphasize that these are not targets. These reductions are built into our base plans. In conjunction with the reorganizations completed in 2019, we established a more rigorous process to capture emission reduction efforts at operating units around the world. Plans developed in 2020 leverage this process and built in additional efficiency steps and accretive investments to deliver these reductions. Like other plan objectives, the performance of our businesses and our senior management will be evaluated based on achieving these commitments. I think it’s important to point out that our plans are in line with the stated ambitions of the Paris Agreement, which you can see on the next chart. This slide overlays both global and ExxonMobil emissions since 2016 with the goals of the Paris Agreement, hypothetical 1.5 degree and two-degree Celsius pathways. As you can see, our plans are consistent with the stated ambitions. Of course, the challenge will be maintaining our progress into the future for both ExxonMobil and society at large. Today, the set of solutions available in overcoming this challenge is incomplete. There is a gap between what is needed and what is available. This is illustrated by the 2016 Paris submissions shown by the green diamond, which is an estimate of the signatories' nationally determined contributions. We are working to close this gap and help provide solutions for society. Our investment in R&D is focused on the world’s highest emitting sectors, manufacturing, commercial transportation and power generation, which together account for 80% of global energy-related carbon emissions and where today’s alternatives are insufficient. As I said earlier, through 2025, we expect to invest more than $3 billion in lower emissions initiatives, which include energy-efficient process technology, advanced biofuels, hydrogen and carbon capture and storage, which is a crucial technology for achieving the goals outlined in the Paris Agreement. Carbon capture and storage is expected to play an important role in addressing emissions from difficult-to-decarbonize sectors. This is also generally recognized as one of the only technologies that can enable negative emissions. In the two-degree scenarios presented by the Intergovernmental Panel on Climate Change, it is estimated that in 2040, 10% of total energy will require CCS. It’s also estimated that 15% of global emissions will be mitigated by CCS. If carbon capture and storage does not progress and play a significant role in decarbonizing the economy, the Intergovernmental Panel on Climate Change estimates that society’s cost of achieving a two-degree outcome would more than double, increasing the cost by 138%. In short, the world is unlikely to achieve the goals of the Paris Agreement without focused action and innovation in carbon capture and storage. Unfortunately, according to the IEA, its development and deployment are not on track. This is an area where we can potentially leverage unique capabilities to make a difference. ExxonMobil has been the global leader in carbon capture for more than 30 years. We believe there is an opportunity to leverage our deep operating experience, history of process innovation, project execution skills, subsurface expertise and ability to scale technology to uniquely contribute in this area. In 2018, we formed a carbon capture venture to identify and develop potential CCS opportunities, using both established and emerging technologies. This group has been working with governments, industry, academia and tech companies to advanced projects. Today, we have more than 20 opportunities under evaluation. With increasing government focus, growing market demand and additional investor interest, we are increasing our emphasis in this area through the establishment of ExxonMobil Low Carbon Solutions. This new business will continue to progress the ongoing venture work while looking to expand other commercial opportunities from our extensive low carbon technology portfolio. The business will focus its efforts on solutions critical to achieving the ambitions of the Paris Agreement, work with governments around the world to promote the necessary policies and regulatory frameworks and partner with interested parties to achieve improvements at scale. While new, this business will hit the ground running, incorporating the existing venture organization and a healthy pipeline of potential opportunities. We look forward to sharing more information as this effort advances. Before we open the lines for your questions, let me close by reiterating our areas of focus. Delivering world-class safety and reliability, driving structural cost reductions, advancing a flexible portfolio of high return, cost advantage investments, maintaining the strong dividend and fortified balance sheet and reducing emissions while developing needed technologies to support the ambitions of the Paris Agreement. Our people delivered in these areas last year, despite the unprecedented challenges of the pandemic. I’m absolutely confident they will deliver even more this year and into the future. I hope I’ve given you a deeper understanding of our strategy and plans for 2021 and beyond. I look forward to providing you with more detail during our March Investor Day and as the year progresses. With that, we’re happy to take your questions.

Thank you for your comments, Darren. We will now be more than happy to take any questions you might have. Operator, please open up the phone lines for questions.

Good morning, everybody.

Good morning, Doug.

Good morning, Doug.

Darren, Exxon Mobil’s equity has outperformed S&P Energy and S&P 500 too since the new capital management plan was announced in November. And as you guys have posted further progress on restructuring exploration and environmental plans too, we did have some industry help along the way. But on this point, it seems like you’re pretty encouraged about the outperformance that you’ve seen on the structural efficiency component that you talked about earlier today. And that divestitures, which are another part of the capital management program probably recover, but in a better price environment. So, my question is whether or not you agree with my characterizations of these two items and also whether or not you have any additional color or specifics on these parts of the capital management program, which make you optimistic about performance in those areas?

Sure. Yes. Thanks, Doug. Thanks for the question. And before I answer that let me just take a minute to congratulate you on your pending retirement, well-earned...

Well, thank you.

I miss having you in the mix.

Well, thank you.

With regards to your comment about the improvements we've implemented, I want to provide some perspective on our journey. As we evaluated the business, we concentrated on enhancing performance over time and acknowledged the necessity, in our capital-intensive industry, to secure a robust set of capital investment opportunities. This was our initial focus as we recognized the significant potential and the leverage it offers in terms of earnings and cash flow. Early in my tenure, I aimed at generating a compelling portfolio of investments while simultaneously advancing an organizational restructuring. We transitioned from the functional organization established during the Exxon Mobil merger, which had its value at that time, to a structure that offers better visibility and direct accountability for profit and loss across the business. This transition was completed in 2019. Last year, during the March analyst meeting, I shared our commitment to leveraging the new organization to enhance efficiencies, which I believe was realized in 2020. As I noted in my prepared remarks, we foresee even more opportunities ahead and have integrated these improved efficiencies into our plans for 2020. This forms the foundation of our strategy and the opportunities for improvement we anticipate moving forward, regardless of market conditions. Additionally, as we discussed in our third-quarter call regarding the pandemic's impact and the economic downturn, we believe that this situation is temporary due to the industry's fundamentals. We aimed to prepare for a future recovery, even though the timing remains uncertain. Currently, I still view the situation as somewhat uncertain but also encouraging in recent months. However, we're not overly reliant on that optimism; instead, we remain vigilant and responsive to market developments. I feel confident about our current position, as our organization is focused on the right objectives, and we have a flexible opportunity set to execute as we move forward. Looking at the first quarter, we're ahead of our expectations and are set to reduce debt while continuing our investment progress. Overall, I feel reasonably good given the lingering uncertainty from the pandemic.

Yes. And then, Darren, you guys made the most asset-rich company in our sector. And last year was kind of an impossible year to even think about selling assets probably. But you have a lot to work with. And so spend a minute on that too on divestitures and progressing that plan?

Right. I think, as you saw last year when we’ve been talking about, we’re really trying to focus the activity on the highest value, highest return, lowest cost of capital at which has meant prioritizing investments and high-grading the portfolio. So, we announced a divestment program, something that we hadn’t historically done and have been out prosecuting that divestment program.

Okay.

We currently have assets on the market. As we mentioned when we first announced the divestment program, it is driven by value. We aim to find a buyer who appreciates these assets more than we can utilize them ourselves. This principle guides our decisions. Last year was marked by uncertainty, leading to limited activity in this area, although we did make some progress. We have strategies in place to manage price uncertainty in our deals, and I anticipate that as the market stabilizes and perspectives become clearer, we will see further progress in the divestment program.

Okay. Great. Thanks a lot.

Thank you, Doug. Best of luck.

Good morning, guys, and thank you for the incremental disclosure. Lots of interesting stuff to unpack. I guess, the first question is I just wanted to confirm, did you say you expect to be on the low end of the $16 billion to $19 billion band this year? And then the follow-up around that is you’re at $67.6 billion of gross debt. Is there an absolute level that you guys are gunning for here when it comes to your gross debt level?

Good morning, Neil. Yes, I can confirm that I expect to be on the lower end of that range. Regarding our debt, we established a hard limit of around $70 billion in the third quarter, and we aim to reduce it. We expect the debt to decrease in the first quarter and will continue our efforts to strengthen the balance sheet. This is one of our three capital allocation priorities, and it's essential for supporting the business as we move forward and navigate through various cycles. The downturn in 2020 was unprecedented, and I’m glad that our capital structure allowed us to respond effectively to that challenging market environment. We utilized our balance sheet strategically and now plan to rebuild it to ensure we have the capacity to manage the inevitable ups and downs that will occur in the future.

Thank you, Darren. I would like to hear your thoughts on mergers and acquisitions. Last year was quite active in terms of new exploration and production deals. How does Exxon view the current M&A landscape and the bid/ask dynamics? The super major cycle of the late 1990s and early 2000s generated significant value. There has been some speculation about this in the media, and while I understand there may be limitations on what you can disclose, do you believe there is potential for significant mergers between major companies, or are there too many challenges in executing such deals?

Yes. Sure, Neil. Obviously, I’m not going to comment on speculation in the press. But what I would say is the approach that we take in this space has been pretty consistent. And we’ve talked about that over the years. And it’s really looking for value opportunities where there’s another company that we can leverage synergies, leverage different portfolios that basically complement one another. We look at a lot of things and that whole space we’ve been active in that for quite some time. We continue to be active to look for opportunities to grow value, unique value. And that’s kind of what drives in our mind the opportunity. And, as you know, we talked about that in the past, having always found opportunities that we felt were valued correctly or valued in line with what would be required to extract unique value through an acquisition or a merger. But we continue to look in that space and it will be an active program going forward.

And if you don’t mind I’d probably add. The other thing that we look at and is the fact that it has to compete against our existing portfolio projects, which is industry-leading best. So, when we look at any type of potential acquisition, we look to compare it relative to some of our other investment opportunities, notably in the Upstream and Chemical space. Thank you, Doug.

Thank you, Neil.

Thank you. Good morning, everyone and happy New Year. I wonder if I could start off asking you to address the 800-pound gorilla driven, which is obviously the criticism of the level that you and the management team by activists. I want to ask specifically to, how Exxon is responding, it seems to us disclosure, for example, in carbon capture and emissions reductions and your demonstrable capital flexibility are all something that perhaps has been overlooked in the past. I wonder if you could speak to how you’re looking to address that and I’ll go to follow up, please.

Good morning, Doug, and Happy New Year to you. Last year was clearly an unprecedented event that required significant action in the industry and for our company. As we adapted to the new organization and adjusted our plans in response to the pandemic and its aftermath, we made many changes and began operating under a new set of constraints. Reducing our balance sheet meant we needed a different approach moving forward. Our focus was on rebuilding the plans for 2020. I believe the organization responded exceptionally well to the difficult conditions, efficiently managing our businesses while also developing comprehensive plans to navigate the increased uncertainty and the recovery necessary after the pandemic. We acknowledged that these plans were different from previous ones and prioritized clear communication about them. Consequently, after the Board approved the plans, we released information at the end of the year to provide perspective and prepared for this call to discuss the details with the investment community. We've been actively working on this for quite some time, and I want to highlight the considerable effort the organization put into 2020. Our goal is to keep the broader community informed about these plans given the constraints we are facing.

I understand this is a challenging question to address, and I appreciate your clarity. I would like to follow up on one point regarding cost flexibility and the dividend. It appears that you are emphasizing the sustainability of the dividend. Could you elaborate on that? Additionally, could you discuss the turning point in non-productive capital? It seems you have invested significantly in areas that are approaching that turning point, which could reinforce the perception of dividend security. I would appreciate your thoughts on these matters. Thank you.

Sure. I think we've built the plan around three key capital allocation priorities that I mentioned earlier, aiming to optimize value for the corporation. Our underlying strategy from 2017 and 2018 is still in play. We've tested our projects and investment opportunities, and they continue to look attractive in the current environment, as evidenced by our substantial investments in the Upstream portfolio. Our approach is to pace investments as we move forward based on market conditions. We've structured our capital program to retain flexibility, keeping in mind the experience we had last year and the decrease in capital spending. We've allocated funds for short-cycle investments in the Permian where we have clear flexibility. Additionally, we've been working with our project teams to reoptimize our capital program, putting some longer-term projects on hold in a warm standby mode so we can restart them when necessary. We’ve also made sure to fill our pipeline early to prepare for future needs outside the current plan period. This allows us to make real-time decisions on whether to continue or scale back these investments based on market conditions. Our charts show that we have substantial flexibility in various price environments to maintain the dividend. We're confident in our ability to grow cash flow, but we can also pull back if needed. We believe it's essential to have options and flexibility, rather than starting from scratch without a plan. That way, we're better positioned to seize opportunities if the market improves more than expected.

I think your flexibility is underappreciated by a lot of people. Thanks so much, Darren. I appreciate the answers.

Great. Thank you, Doug.

Thank you, Doug.

Hey, good morning, Darren.

Good morning, Phil.

So, first question and perhaps it’s a signal of the times. But the charts around your flexibility only take the oil price up to $55 at this point, which is notable considering we’re at $58 now. So, I’m curious, is this message today, one, where we’re supposed to be taking it as an official cap on the capital spending long-term in the $20 billion to $25 billion range, such that any additional cash flow in an upside case would be fully committed to debt reduction? You did mention shareholder distributions in one of those slides as well. So, just any incremental thoughts there.

Sure, Phil. We’re uncertain about future price movements and we haven’t structured our plans based on speculation. Instead, we focus on reasonable assumptions. We validate these assumptions against third-party data and general market trends. Our goal is to stay within and, ideally, at the lower end of price expectations, so our plans are built with that in mind. We acknowledge that those prices may not be realized and could fluctuate, allowing for some flexibility. The higher figures on the chart are simply placeholders; the more they increase, the better it is for us. If we encounter a price environment that exceeds our expectations, our first priority will be to reduce debt and strengthen our balance sheet. Balancing our capital allocation priorities is crucial, which sometimes requires short-term trade-offs. Last year, during a significant downturn that we anticipated to be temporary, we prioritized maintaining our dividend and strengthening our balance sheet. As we recover, our focus is on rebuilding our financial position to withstand future challenges while continuing to invest in profitable projects that are essential for long-term success. The key themes for us over the past year have been balance and flexibility, which our current plan reflects as we discuss today.

Okay. Got it. My follow-up question would be around Slide 30 and your commentary about how the first quarter is shaping up. Obviously, on this slide, the only area where the margins are well below the low end of the range is on Downstream. And based on your long history in that business and how you’re seeing things today specifically for Downstream, would you say that the margins right now are consistent with low end of the range and kind of the $3 billion annualized uplift that you’re talking about? I recognize you made a comment that in totality you are there, but I’m specifically thinking more about the Downstream? Thank you.

Yes. The chart shows a January estimate for the Downstream, and our current position remains significantly outside the historical range. Looking at the industry globally, the current margin levels are unsustainable due to accumulating losses. Historically, there’s a threshold for these businesses; they cannot operate below a certain point without incurring losses and needing to make adjustments. This historical range defines those limits. These are commodity-driven businesses, and pricing below marginal supply costs will harm the industry, leading to rationalization and exits. Throughout my experience in the Downstream, supply has been consistently long, and it takes time to tighten that up, especially with new refineries opening in Asia. What we’re observing is part of the normal cycle of rebalancing supply and demand. Demand has decreased significantly, compounding an already tight market. Recovery will depend on the speed of demand resurgence and ongoing rationalization. As Stephen mentioned, we witnessed a higher level of rationalization last year, and I expect this will continue if margins don’t recover to within the historical range.

Got it. And do you think we’ll get there in 2021 towards the low end at some point?

The recovery will depend significantly on how the economies rebound. While there are mixed views, we are adopting a conservative approach in our planning, acknowledging that the mechanisms needed to balance the market will take time. I anticipate the second half of the year will be much improved compared to the first half, but it's challenging to predict precisely where we will land. Ultimately, I believe we will reach that point, whether later this year or sometime next year, and we may even see an overcorrection as demand rises and supply diminishes, leading to a tighter supply-demand situation in the downstream sector. The critical aspect here is understanding that these are fundamental factors at play; it’s not about if they will happen, but when. The key takeaway is to recognize this trend is forthcoming, but to avoid basing our plans solely on the hope that it will occur.

Great. Thanks, Darren. Look forward to more updates in March.

Thank you, Phil.

Thank you. Thank you Darren for taking the questions. The first one is on the announcement around CCS. I mean, it seems to me is that you’ve taken your time the step into it is a considered one. And I guess it must be based at least with a view that the prospect of the business there. And so, my question was, what do you think has to happen or are you able to describe some of the steps that have to happen, both technologically and regulatorily fiscally to get us from where we are now to something that looks like a genuine business opportunity? And the second question, if I ask a follow-up as well at the same time. Just on CapEx, is it fair to characterize the level of CapEx that you need to address one of those three objectives that you had, which is to sustain the dividend over the very long term, but CapEx needs to be in that 2021 to 2025 and the current level of spend that you’re projecting for 2021 is more around about protecting the balance sheet and therefore not a sustainable level of CapEx in the long-term consistent with your payout? Thanks.

Yes, certainly, Jon. Regarding carbon capture and storage, I believe, as I've previously mentioned, that it plays a vital role in meeting the goals of the Paris Agreement. Over time, there has been a growing acknowledgment of the significance of this technology, which the IEA has referred to as gaining momentum. While the industry has long understood its importance, there's now broader awareness of its role in achieving the Paris Agreement objectives. We've dedicated substantial effort to advancing the technology and reducing costs to make CCS more appealing and its deployment faster. Our focus has been on the fundamental process technology that effectively concentrates CO2. Despite further developments needed, we are making progress. With the increasing recognition of the necessity for this technology, governments are becoming more receptive to establishing supportive policy frameworks, and we are experiencing growing investor interest in related projects. Additionally, a market is developing for reduction credits, contributing to the overall momentum in this space and establishing a sustainable business. Therefore, we believe the time is right to intensify our efforts in this area, ensuring we have the right people engaged with governments to accelerate progress. In terms of our existing product portfolio, significant challenges remain within the policy and regulatory landscape, which we are prioritizing. Here in the U.S., the current administration is keen on advancing these initiatives, and we are prepared to engage with them and provide industry insights. We believe it is the appropriate moment, and we have assembled a capable team to drive this forward. However, this area is complex with many interrelated factors that we need to coordinate, ensuring senior management is focused on these aspects. Concerning CapEx, you are correct that our 2021 expenditure represents the lowest level we've seen since the Exxon and Mobil merger. History indicates that this level of capital spending is likely not sustainable, as it reflects our response to the current environment and the recovery we are experiencing. Looking ahead, our 2022 through 2025 spending guidance is higher, acknowledging the need for increased expenditure in a more stable environment to support growth and align with our capital allocation priorities.

Makes sense. Thank you.

You bet, Jonathon.

Good morning. Thank you for following on me.

Good morning, Sam.

I did want to dig into commercialization of carbon capture a little bit, because there is a few paths you could just sell carbon credits where applicable, but it also integrates with the rest of the business in an interesting way, particularly gas in terms of customer overlap and bundling opportunities. I know it’s early days. But can you just talk about that as something that’s kind of leading the way in this commercialization effort? How it overlaps with the existing business? Thanks.

Yes, I believe the point you made is the one I was trying to discuss with Jonathon. The market demand for cleaner options, offsets, and emissions reduction is significant. We see an opportunity here with many of our products. This trend is evident across all our sectors; for instance, in the Downstream sector, particularly with gas, we recognize opportunities in our recycling efforts and in enhancing the environmental footprint of our Chemical business as well. The momentum we’re seeing in this area is creating market opportunities that we believe we can actively engage in and contribute to. To make a substantial impact, broad investment over time is necessary, and we have many capabilities that support that. We’ve been working on technology development, and we have a projects organization that knows how to scale and apply these technologies. Additionally, we have a manufacturing capacity that we can leverage and a solid understanding of subsurface dynamics. Our involvement in midstreams and pipelines complements this effort. When you consider the various elements needed to successfully establish a CCS business, it aligns well with our current operations and our expertise. Therefore, we view this as a significant opportunity. The main challenge has been developing the market and addressing its needs, but as we witness momentum increasing, we recognize potential in this area. That is the focus of our efforts.

Thanks. And then just as a follow-up in terms of scale and the addressable market here, your slide on carbon capture as a percentage of the total carbon offset targets around 15%. Let’s say, Exxon in your 2019 Sustainability Report, you have about 120 million tons of Scope 1 and 2 emissions. Is the 15% number of that kind of a reasonable scope, call it, like 18 million tons potentially of scalability here, is that kind of the way you're thinking about it?

I would say that transitioning from a venture to a fully developed business is one of the advantages within the company, as it allows us to integrate that business into our planning process. We can develop marketing and business plans, create annual plans, and outline all opportunities. This year will be significant for this business as we provide Joe the opportunity to take charge and align his organization with our marketing and business plans, translating those into our company planning process. By year-end, we will start to track this business similarly to our other operations. That question will be addressed as we progress and explore these opportunities. It’s important to note that many factors must align for these initiatives to advance, including market dynamics and governmental responses in terms of regulatory and policy frameworks. This is a complex area, but it aligns well with our historical actions, and I am optimistic about our ability to contribute meaningfully, helping society reduce emissions. However, there is a lot of work ahead, and as we make progress, we will keep you updated on the potential and development of these opportunities. Thank you so much.

Well, thank you for your time and thoughtful questions this morning. We appreciate you allowing us to opportunity to highlight fourth quarter results. We appreciate your interest and hope you enjoy the rest of your day. Thank you and please stay safe.

Thank you.