Exxon Mobil Corp (XOM) — Q1 2021 Earnings Call Transcript

Thank you, and good morning, everyone. Welcome to our first quarter earnings call. We appreciate your participation and continued interest in Exxon Mobil. I am Stephen Littleton, Vice President of Investor Relations. 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, Darren will provide his perspective on the quarterly results and how we are positioned for 2021. Following those remarks, Darren and I’ll be happy to address any 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 to the supplemental information at the end of this presentation. I’ll now highlight development since the fourth quarter of 2020 on the next slide. Across all three businesses, improved results reflect encouraging signs of the recovery from the pandemic as vaccinations are administered and some restrictions are lifted. In the Upstream, liquids and gas realizations improved significantly versus the fourth quarter. Production was higher driven by lower government mandated curtailments and higher seasonal gas demand in Europe. As part of ongoing efforts to high-grade our portfolio, we announced the sale of most of our non-operated assets in the United Kingdom, Central and Northern North Sea. The sale price of more than $1 billion is subject to closing adjustments and has potential upside of approximately $300 million in contingent payments, based on commodity prices. In the Downstream, we continue to realize improvements in the North America refining margins. However, in Europe margins remained impacted by COVID lockdowns. While we have seen improved demand for gasoline and diesel, jet demand remains impacted by global travel restrictions. During the winter storm our Texas refineries were able to provide power to more than 200,000 homes through our cogeneration facilities. During the quarter, we announced the intent to convert both the Altona Australia refinery and the Slagen refinery in Norway to fuel import terminals, as overall industry rationalization continues. In the quarter, there were approximately 500,000 barrels of industry rationalizations announced. In Chemical, tight industry supply, shipping constraints and strong demand resulted in global average margins improving to the top of the historic 10-year range. We were able to capture the benefits of these improved margins with strong reliability and the rapid recovery of our operations from the winter storm. In addition, we have continued to deliver further cost efficiencies. Across the corporation, improved prices and margins in addition to cost reduction initiatives resulted in increased cash flow from operations, enabling debt reduction of more than $4 billion in the quarter. In February, operations across all three businesses were impacted by winter storm Uri. Repairs were completed and operations fully recovered by the end of the quarter. Finally, we established a low carbon solutions business to commercialize and deploy our portfolio of emission reduction technologies. The new business will initially focus on carbon capture and storage, one of the critical technologies required to achieve net zero emissions and the climate goals outlined in the Paris Agreement. Let’s move to slide 4 for an overview of first quarter results. The table on the left provides a view of first quarter results relative to the prior quarter. First quarter earnings were $2.7 billion, including $31 million of identified items related to severance. Earnings, excluding identified items were $2.8 billion, an increase of $2.7 billion versus the fourth quarter. Despite the impacts of the winter storm, which you will see caught out in the table, earnings improved across all businesses, primarily due to higher prices and margins. There was a $300 million benefit in the quarter from mark-to-market impacts on open financial derivatives, for which the physical trading strategy has not closed. We expect to realize the full earnings impact of these trading strategies when they close in the future. Also, we have continued to benefit from structurally lower operating costs in all of our business lines. On the next slide, I will cover a brief summary of quarterly results. I will focus my comments on the underlying business performance, excluding identified items. Upstream earnings improved by over $1.8 billion in the first quarter with liquid realizations increasing by 42%, and gas realizations by 33%. The earnings change associated with volumes was negatively impacted by mix and timing effects, which offset higher production versus the prior quarter. Lower expenses including structural efficiencies contributed approximately $170 million in earnings. On the next slide, I will cover a brief summary of Upstream volumes. Upstream volumes increased by an average of approximately 100,000 oil equivalent barrels per day compared to the fourth quarter of 2020. Gas volumes were 12% higher, mainly due to seasonal gas demand and lower scheduled maintenance. Liquids were down 3% with winter storm impacts and higher maintenance. Lower entitlements due to higher prices negatively impacted volumes by approximately 40,000 oil equivalent barrels per day. Reduced government mandated curtailments increased volumes by about 60,000 oil equivalent barrels per day and gas demand was higher by approximately 70,000 oil equivalent barrels per day, mainly due to seasonal gas demand in Europe. Guyana and Permian production were essentially flat versus the fourth quarter of 2020. However, compared to the first quarter of 2020, Permian production was approximately 20% higher excluding the impact of the winter storm, an average of around 395,000 oil equivalent barrels per day in the quarter. Guyana production increased by approximately 70% or 19,000 barrels per day over the same period. Moving to slide 7. Downstream earnings improved by over $300 million in the first quarter, despite the impacts of the winter storm. During the quarter, margins improved by nearly $500 million as North America product demand continued to rebound. There was almost $400 million of earnings benefits from the expense reductions in the quarter, including structural efficiencies related to maintenance, optimization, logistics, and marketing. We also had unfavorable foreign exchange effects in the absence of prior period inventory impacts during the quarter. A reserve for announced terminal conversion is included in the other factor. Moving to Chemical on slide 8. Chemical had a strong quarter, delivering over $1.4 billion in earnings, more than a $700 million improvement versus the fourth quarter. Margins improved by $500 million, driven by tightly supplied polyethylene and polypropylene markets, impacted by the winter storm where at its peak, approximately 75% of U.S. polyethylene capacity was offline. Performance products demand into packaging and durable goods was resilient through the period. During the quarter, we had strong reliability, which positioned us to capture the improved margins. We continued to deliver cost reductions through turnaround and maintenance scope optimizations, contributing an additional $150 million to earnings in the quarter. On the next slide, I will summarize results versus the first quarter of 2020. Versus the first quarter of 2020, earnings increased by around $500 million. There was a total price margin improvement of about $1.3 billion, driven by higher Upstream prices and Chemical margins as the market recovered. This is partially offset by lower Downstream margins, but excludes the mark-to-market impact of unsettled derivatives, which was driven by the absence of a benefit in the first quarter of 2020. Cost reduction efforts, including structural efficiencies and maintenance, supply chain optimization, and the announced workforce reductions contributed over $1 billion of improvement to earnings. Moving to slide 10, I’ll provide further details on our cost savings and CapEx reductions. Excluding energy and production taxes, cash operating expenses were $9.2 billion in the first quarter, $1 billion lower than the same quarter last year. This reflects the significant structural improvements achieved in 2020 from our ongoing cost reduction initiatives. Capital expenditures were $3.1 billion in the quarter, on track towards the lower end of our full-year guidance. This reduction of over $4 billion versus the first quarter of 2020 was enabled by the flexibility of our short cycle unconventional assets and by our ability to pace Downstream and Chemical projects, consistent with market conditions. As Dan will cover later, we were able to do this while preserving the long-term value of the opportunities. Moving on to a summary of cash flow on a slide 11. Cash flow from operating activities was $9.3 billion in the quarter. Excluding working capital effects, this was up $3.2 billion from the fourth quarter of 2020, reflecting our ability to capture higher prices and margins, and the results of our cost reduction efforts. We reduced debt by more than $4 billion, consistent with our capital allocation priorities. We ended the quarter with $3.5 billion of cash. Turning to Slide 12, I will cover a few key considerations for the second quarter. In the Upstream, government-mandated curtailments are expected to be in line with the first quarter. We expect lower volumes with seasonal gas demand and higher maintenance. The sale of the UK Central and Northern North Sea assets is expected to close near midyear, subject to regulatory and third-party approvals. In the Downstream, we anticipate demand improvement in line with third-party forecasts with jet continuing to recover at a slower pace than gasoline and diesel. Higher scheduled maintenance and turnarounds are planned for the quarter. In Chemical, we anticipate a tight supply and demand balance with ongoing industry maintenance impacting global supply, and we have higher planned turnarounds in the quarter. Corporate and financing expenses are anticipated to be about $600 million. And we expect to further reduce debt if prices and margins remain at current levels.

Thank you, Stephen, and good morning, everyone. It’s good to be back with you. This time last year, I joined the call to discuss the challenges of COVID-19 and how we plan to respond. At that time, we were early in the pandemic, but the call to action was clear. We made some tough decisions and committed to bold actions. In our fourth quarter call, I reviewed our results, the success we had in meeting, and in some cases, beating those bold commitments. We made a lot of progress over the course of a challenging year. The positive results we announced today reflect not only last year’s work, the work we started years ago, which has positioned us to take advantage of market improvements. Today, I joined the call to put that work in context. I’ll discuss the foundation for success that we’ve laid and how it will manifest in growing shareholder value, value that will further materialize as markets continue to recover and as the world transitions to a lower carbon future. Our successful response to the unprecedented challenges of 2020 has its roots in two critical initiatives started years earlier. The first was our focus on developing an industry-leading portfolio of advantaged investments to recapitalize our businesses and increase capacity to generate earnings and cash. Prioritized investments in these opportunities last year are paying dividends this year and will continue to well into the future. The second initiative, which began in 2017 and was completed in 2019, was a significant restructuring of our businesses, reducing functional silos, organizing along value chains and consolidating competencies. This greatly reduced organizational complexity, interfaces and overhead. We provided a clearer line of sight to the market, increased ownership for earnings at all levels and improved the speed and quality of decision-making across the corporation. Importantly, it helped our people better relate their work to our bottom line results. We see the benefits of this in the first quarter results. Through structural changes, we’ve permanently reduced operating expenses, capturing $3 billion in 2020 versus 2019, with further efficiencies in the first quarter and more expected through the year. In total, we expect to achieve $6 billion of annual savings by 2023 versus 2019. At the same time, we reduced emissions, operated safely and delivered best-ever reliability performance. Our focus in this area also paid off in the first quarter with a well-managed response to the Texas ice storms, minimizing impacts and speeding recovery. Throughout 2020, we worked to strike a difficult balance, dramatically reducing near-term spend without compromising longer term value. We used our balance sheet to maintain spending that was critical to shareholder value, including sustaining a strong dividend. We also maintained our work in advancing low-carbon technologies and developing projects with the potential to significantly reduce society’s emissions. This work is crucial in underpinning our long-term future and in continuing to grow shareholder value. It also facilitated the launch of our Low Carbon Solutions business in the first quarter, a strategic business that we expect to grow with significant investments as we advance low-carbon technologies. We prioritized maintenance activities, ensuring essential work was completed last year and the remainder early this year, ahead of the anticipated demand recovery. We reduced 2020 CapEx by 30% versus our original plan. We did this by pacing project execution and leveraging our global projects organization to prioritize and optimally slow projects. We are continuing to pace projects to rebuild the balance sheet and pay down debt. In the first quarter, we made significant progress. Investments are in line with our outlook for the year of $16 billion to $19 billion, and debt was reduced by over $4 billion. Throughout this time, we’ve never lost sight of the long-term fundamentals of our business. We knew economies will recover, populations and living standards would continue to grow, ultimately driving demand for our products and an industry recovery. Today, we are beginning to see this and are well positioned. Thanks to our efforts over the last few years, we are a stronger company with an improving outlook. You will, of course, recognize this chart, which we’ve used since our third quarter call last year. At that time, we made the point that the pandemic had driven industry prices and margins to unsustainably low levels. And while hard to predict when that margins and prices would rebound. And today, we’re seeing this rebound, which is happening faster than we thought and for some sectors, rising to higher levels than anticipated. The Upstream is back within the 10-year range with Brent prices improving by roughly 40% since the fourth quarter and natural gas up by about a third. In the Downstream, margins remain well below the bottom of the 10-year range. Chemical margins, on the other hand, have swung from the bottom to the top. One thing is for sure, these margins and prices will continue to move. We’ve based our plans on a conservative outlook and are positioning our businesses to be successful at or below the bottom of these ranges. At the same time, we’re making sure that when the upswings come, we take advantage of it, which is why we went to great efforts to preserve our portfolio of investments while building in flexibility. It’s also why we test each investment against a wide range of market scenarios and insist on structural advantages to generate leading returns at any price. Today’s portfolio of opportunities is the best we’ve seen in 20 years. Ninety percent of our Upstream investments and resource additions over the next five years, including Guyana, Brazil and the Permian, generate 10% returns at $35 a barrel or less. In Guyana, we’re continuing to progress Liza Phase 2. Payara is on schedule, and we’ve begun planning for the next development, Yellowtail. The Bacalhau development offshore Brazil is advancing toward a final investment decision, and we’re delivering greater efficiencies in the Permian, efficiencies that are driving down costs for drilling and completions while improving recovery rates and growing production. Based on these improvements and without additional capital, we’ve increased our 2021 outlook to between 410,000 and 430,000 oil-equivalent barrels a day. The Corpus Christi Chemical Complex is ahead of schedule with a projected start-up in the fourth quarter. We expect to complete the project for about 25% less than the average cost of a Gulf Coast steam cracker. This facility is a key development in our plan to grow sales of high-value performance products by 60% through 2027. As we focused our activities on the highest value investments, we also worked hard to preserve the value of the projects we were pacing. As I mentioned, our global projects organization played a critical role in this, working closely with contractors, partners and resource owners to find efficiencies and reduce spend. Every project was reevaluated and tested against conditions informed by the pandemic, while all remained attractive and in our portfolio, the highest-value opportunities were given priority. Pace projects were evaluated for optimum breakpoints, with work continuing until these were reached. You can see this in the photos, which show the project status at the time the pandemic hit and when they were paused. Working closely with contractors, our team successfully offset deferral costs with efficiencies and market savings and preserved portfolio returns of greater than 30%. The CapEx outlook we provided incorporates resumptions of these project activities over time as the market recovers and we make progress deleveraging. Striking the right balance in our capital allocation priority was critical, as demonstrated by the price and margin chart. This was particularly true in the depleting businesses of the Upstream. The value of the choices made here are shown in the next couple of slides. We are excited by the results of the significant work and strategic investments made since 2017 to reshape our portfolio into one of the most price competitive in the industry, generating strong returns in a variety of price environments. The chart on the left, similar to the one used on Investor Day, shows the Brent price needed for upstream resource investments made in 2020 to generate a 10% return. As you can see, more than 90% of the investments require Brent price at or below $35 a barrel. On the right are the anticipated cash flows resulting from the projects retained in our 2020 investment program for this year and in 2025. As you can see, the investments we made in 2020 are making a significant contribution now and into the future. This is particularly true in the Permian, shown on the next slide. Last year, we reduced Permian CapEx by about 35%, but maintained a level of investment to support our technology efforts and drive improvements. This work contributed to an additional 100,000 oil equivalent barrels per day in 2020 versus 2019 and an increase of 60,000 barrels per day in the first quarter of this year versus the first quarter of last year. This work also drove significant progress across a number of variables, as shown on the left. Higher well productivity and lower costs resulted in positive free cash flow in the fourth quarter of last year, which will continue through 2021. In addition, with the Poker Lake processing facility online and pipelines commissioned, we can ensure production is delivered to the highest value outlet at the lowest cost. Hopefully, these last two charts help illustrate the importance of striking the right capital allocation balance to preserve longer term value, particularly in trying times. Our first quarter results helped demonstrate this. We maintained our strong dividend, generated strong cash flow, delivered further cost reductions, remained flexible and disciplined in our capital spend, delivered excellent safety, environmental and reliability performance, and advanced solutions for a lower carbon economy. As we progress through this year, we’ll maintain our capital priorities and a balanced approach. Our planned capital range for 2021 remains $16 billion to $19 billion with the outyears at $20 billion to $25 billion. If markets take an unexpected downturn, we have the flexibility to adjust. If margins and prices stay higher than planned, we’ll deleverage faster, rebuilding the balance sheet. As the price and margin chart I reviewed earlier demonstrated, things can change quickly. A strong balance sheet remains a critical advantage in a capital-intensive commodity business. It also provides an important foundation for managing an uncertain future and the transition of the energy sector, which I’ll turn to next. I’ll start by restating our strategy and addressing the risks of climate change and the energy transition, a strategy based on four pillars we’ve had in place for many years. It begins with mitigating emissions in our operations, which has been a focus for decades. Versus 2016, 2020 GHG emissions are down 11%. We met the methane and flaring reductions we committed to in 2018 and established aggressive emission reduction plans through 2025, putting us on a trajectory consistent with the goals of the Paris Agreement. We are committed to providing products to help customers reduce their emissions. Across the globe, we’re helping economies decarbonize by providing natural gas for power generation, reducing emissions by more than half versus coal. Our chemical products reduced vehicle weight, lowering transportation emissions and preserve the shelf life of food, reducing waste and agricultural emissions. Our fuels and lube products improve efficiency, also helping to reduce emissions. We’re also proactively engaging on climate policy. We’ve demonstrated this through our support for the Paris Agreement and economy-wide price on carbon, consistent regulations to reduce methane emissions and frameworks to support investment in carbon abatement. Finally, we’re focusing on developing and deploying scalable technology solutions that are needed to reduce emissions on a larger scale. We’re focusing on the hard-to-decarbonize sectors of power generation, heavy-duty transport, and industrial manufacturing. We’ve launched our Low Carbon Solutions business to commercialize technologies and accelerate large-scale emission reductions in these areas. Since 2000, we’ve invested more than $10 billion in lower emissions technologies and have plans to invest an additional $3 billion by 2025. Our initial emphasis is on carbon capture and storage, or CCS, a technology critical to achieving the goals of the Paris Agreement. I expect the magnitude of investments to grow as we work with industry, governments, and communities to advance attractive project concepts that also generate shareholder value. Having said this, it’s important to keep the current level of planned investments in perspective. When you compare the investment levels of our Upstream, Downstream, and Chemical businesses with the size of their markets, our spend represents less than 0.3% of the total addressable market. We do the same for our planned investments in CCS. They represent over 3% of the total addressable market, more than 10 times the level of investments in our traditional businesses. We think this is reasonable given the early stage of this market’s development. With our industry-leading position and decades of experience in CCS, we’re well positioned to successfully compete in this growing and potentially large future market. As we tried to illustrate in this chart, today, we’re the global leader in capturing CO2. In fact, we’ve captured more anthropogenic CO2 than anyone in the world. We have an interest in over one-fifth of the world’s CCS capacity and significant holdings in CO2 pipelines. Grassroots, large-scale CCS projects leverage our competitive advantages in technology and project management as well as decades of experience bringing new ventures to market. This is important, particularly for this potentially fast-growing large market, and it’s why we launched the Low Carbon Solutions business, which is evaluating and advancing plans for more than 20 new CCS opportunities around the world. Last week, we introduced the concept of a multi-industry CCS hub to capture and store CO2 emissions from the heavy industry around the Houston Ship Channel. We think a carbon capture innovation zone, similar to an enterprise zone where incentives and policies are designed to encourage economic growth, is a smart way to advance this idea. We help bring together government incentives and private sector investments along with new policies and regulations that would encourage innovation. Houston is an ideal location for a major project. The plants along the heavily industrialized ship channel represent some of the hardest sectors to decarbonize. They’re also relatively close together, providing project scale and reducing unit costs. Houston’s proximity to the Gulf of Mexico also provides direct access to suitable storage locations. The U.S. Department of Energy estimates the geology beneath the seafloor has the capacity to safely store all the CO2 that the entire country currently produces for the next 100 years. As currently envisioned, the project could capture 50 million metric tons of CO2 per year by 2030 and twice that by 2040. This would put Houston well on its way to reaching its goal of becoming carbon neutral by 2050. This concept will need support from many different parties, both private and public. Regulatory and legal support at all levels of government will be crucial for establishing incentives and attracting investment. The federal government already provides some carbon reduction incentives such as tax credits for electric vehicles, wind, solar, and CCS. Enhancing these credits or establishing a market price on carbon emissions, combined with appropriate rules and oversight, would accelerate solutions. We’ve long talked about the importance of innovation. This multiuser hub concept is just one example of how we’re looking to take on large, complex challenges and find solutions to help meet society’s demand for a lower carbon future. This can play an important role in positioning the Company to deliver long-term shareholder value. The first quarter results clearly show that we’re on the right path and well positioned for a continued market recovery. We will remain flexible while focusing on disciplined investing in high-return, competitively advantaged projects. This will provide the foundation for strong cash flows, a strong dividend, and a strong balance sheet. We will remain relentless in structurally reducing costs by fully leveraging our new organization. We will continue to deliver industry-leading safety and reliability performance, meet our emission reduction plans, and help society transition to a lower carbon future, and we will do all this to grow shareholder value. I look forward to taking your questions.

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

Good morning. Thanks for taking my question. Congrats on the strong results. Good to see some of the cost reductions and growth investments really paying dividends here in 2021. My first question is actually building on some of the last points you were making, Darren, on carbon reduction efforts in the Houston hub specifically. I think it’s a very interesting concept, has a lot of potential. I was wondering if you could elaborate from a policy standpoint, what types of things are needed or policies need to be put in place in order to bring these types of projects to fruition. And then, are there other parts within your portfolio globally where there are already policies in place to make these types of investments viable today?

Sure. Thanks, Devin. So, as I mentioned in my prepared remarks, what we’re looking at doing in this space and reducing CO2 across economies is really establishing a new business, one that today doesn’t have clear market drivers. The governments have demonstrated, in other industries when they’re looking to reduce CO2, they provide stimulus to catalyze advancements of new technology. I think the big difference with what we’re talking about here versus some of the other initiatives that the government has supported is there’s not an existing business or market that provides some level of financial incentives. So, I think the work that has to be done with the government is aligning on the incentives to drive investments across industries to drop and lower the CO2 price. We think we can do that and do it at a very attractive rate of return at much lower prices than what the government is currently spending to reduce CO2. If you recall from our Investor Day, we had a chart that showed the costs associated with reducing CO2 through carbon capture and compared that to the cost of CO2 removal through other mechanisms. We have the opportunity to reduce significant levels of CO2 at a much lower cost than current policy. So, that will be an important part, policy to drive incentives. You’ll need policies and frameworks to support the legal regime for storing CO2, including permitting to put the facilities in place and run the pipelines. There are a number of areas that will need to be addressed. And then, obviously, we’ll have to work with the industries involved here and work with them collaboratively to bring the CO2 in, and then also, of course, the communities that we’ll be operating in. We believe that’s all possible. If you think about the work we do around the world in establishing new ventures, bringing new ventures to market, this is very consistent with our experience base. I’ll point to Guyana, where essentially we started from grassroots, building a brand-new oil and gas industry, working very closely with the government and community there in Guyana. So, we’ve got experience in this space.

Great. That makes a lot of sense. And my second question is just on the cost reductions. So, you realized $3 billion last year. And if you look at the slide deck in the first quarter, you’re down about $1 billion in the first quarter of '21 versus the first quarter of last year. So, annualized, a $4 billion reduction so far. And you mentioned in your prepared remarks that you expect the reductions to increase and move through this year, and I know you have a longer-term target of $3 billion of incremental cost reduction. My question specifically, though, is how should we think about the cadence of these cost reductions flowing through for the balance of this year and over the next few years? And as you’ve embarked on these restructuring initiatives, have you found opportunities that might allow you to exceed this target over time, the $6 billion total target?

Sure. I want to start by addressing the $6 billion. I want to clarify that this is not a target we have set for the organization to work towards. Instead, it is a part of our established plans, and the organization is fully aware of the necessary reductions, integrating them into their strategies. We are monitoring the businesses monthly against these plans and are confident about what we have discovered and the ongoing work. The first quarter shows that we are on track with the reductions. However, I advise against extrapolating first quarter results too broadly, as we expect to see variations in activities throughout the year. Nonetheless, my expectation is that the trend of reductions will persist, and we are on course to achieve the $6 billion by the end of 2023. Additionally, as we progress and put our plans into action, I anticipate we will identify more opportunities, potentially exceeding our original plans. We have undertaken efforts that encompass the entire corporation, including a structural change in how we manage our businesses. This change aligns the sectors in terms of organization and many of the processes essential for operations. This consistency in processes and execution allows us to discover further efficiencies and synergies. This work is currently ongoing and will continue to evolve throughout the year, and I believe we will have more to share as we solidify our plans later this year and into next year’s Investor Day. I remain optimistic that the foundations laid since 2017 and our reorganization efforts are yielding positive results now and will continue to do so in the future.

I guess, Darren, if I can add, the other piece that we’re seeing, Devin, is as we’ve invested in technology, that’s starting to see its benefits in terms of reducing our overall cost structure with the technology and IT investments.

I hope you can hear me okay, because I think the storms here in Houston are affecting my connection a little bit. So, apologies...

You’re loud and clear, Roger.

Great job this quarter in the Chemicals business, Darren. Despite various challenges like storms and significant pricing fluctuations, do you believe the Chemicals business has reached a turning point? While I don't mean to suggest that the performance of Q1 will persist, it does seem to be an improvement compared to the past six to eight quarters. When considering this, do you attribute it mainly to demand or pricing performance? We've been hearing plenty about inflation in various industries, so I'm interested in what factors we should consider regarding Chemicals.

Sure. And thanks for the question, Roger. I would say the first quarter performance in Chemicals, first and foremost, reflects that organization’s focus on running their operations reliably and safely, a lot of hard work to make sure that the integrity of the operations and reliability of those operations are maintained. We did a lot of work over last year. Moving into the first quarter, that focus has really helped our manufacturing facilities deal with the freeze and recover very rapidly from that. So, I’m really proud of that effort. It wasn’t easy, but that organization really delivered. I think the other thing it demonstrates is the focus they’ve had for several years on growing their high-performance products. We knew that the demand for chemicals has been consistently strong and has been growing in excess of GDP growth around the world. That fundamental, we think, will continue for some time since chemicals play such an important role in people’s modern life and the convenience of modern life and actually the critical importance of some of the products that chemicals make. Of course, the big challenge there, though, is as supply comes on in fairly large chunks, with different plants, that tends to result in supply and demand imbalances and lower margins. Of course, we saw that last year and frankly, going into this year, we kind of anticipated a lot of capacity coming on, which would squeeze the margins and make for a challenging year. I think what we’ve seen is with the impact of last year and the pullback in spending that was required due to the pandemic and then probably exacerbated by the Texas storm here with all the capacity in the Gulf Coast area, the supply has gotten pretty tight as demand has continued to move. With the economic recovery and the rebound we’re seeing, that’s put some more demand into the system. So, the first quarter reflects good operations, good performance, good focus on growing our high-performance products and some really helpful market conditions from a supply and demand standpoint. My expectation as you move forward is we’ll see some of that supply come back on, a recovery from the ice storms and some of this new capacity that was deferred will start to make its way back into the market, and that will help probably ease some of the tightness. But our expectation is, we’ll continue to see a pretty good market here this year for the Chemical business.

And then my other question, balance sheet. Obviously, you made the debt repayments this quarter commentary about excess cash will go towards debt repayments. Don’t expect you to fix the balance sheet in one year, but kind of reaffirm for us where you’d like to take the balance sheet over time, above and beyond just understanding you want to sustain the dividend, but like what’s the right way to think about whether it’s debt-to-EBITDA or debt-to-cap number, something along those lines?

Yes. Well, as we’ve said, with our capital allocation priorities, there are three legs to the stool, so to speak. Really important for the foundation of success for the future is investing in the right projects, particularly in the Upstream with the depletion nature of that business. We’ve got to find industry advantaged investment opportunities. In the Chemical business, making sure that we’re investing in the high-performance products that meet the demand, the growing demand that we’re seeing around the world. And in the Downstream, investing in strategic sites to high-grade their production and make sure that the production is in line with the demand in the marketplace. That’s a critical element that we stay focused on as we went through 2020, making sure that we didn’t compromise the value of that particular capital allocation priority. The dividend is obviously a critical part of that, and sustaining that dividend was a commitment that we’ve had for a long time, and we stay committed to that. So that’s going to be an important factor going forward. The balance sheet is making sure that we maintain the capacity to ride through the commodity cycles and not compromise those first two priorities that I talked to you about. That’s what we did in 2020. The pandemic was a very unusual year, much deeper than any typical commodity cycle. So, we had to lean harder on that than we normally would. We’re committed now to making sure that we rebuild that in anticipation of future commodity cycles. I think what we said during the Investor Day was we’re going to shoot for something between 20% and 25% debt to capital. That still feels like a reasonable place to be, and we’ll work our way towards that as we go through this year and probably into next, obviously depending upon the price and margin environment that we find ourselves in.

The first question that we have is on the balance sheet, and we’re just maybe looking for a little update here. Based on what you’re seeing so far on the macro and with your own operations, is there any update to the $45 to $50 breakeven for 2021 to cover CapEx to maintain the dividend? I know Chem’s margins, they’ve dramatically improved; Downstream margins, they’re still kind of below the 10-year band.

Yes. And so, if you remember how we did that breakeven as we made some assumptions about kind of low end of Chemical and Downstream margins and then average Chemical margin and Downstream margins going forward. Recognizing that that wasn’t necessarily forecast, it was just one way to characterize it. The important point we were trying to make, and I think we’ve made historically, is as you look at our breakeven, you can’t just focus on the crude price that we’ve got significant businesses in both the Downstream and Chemicals that impact that. I would say, we haven’t tried to update that number. What we tried to do with the Investor Day is just give you and others the confidence that with our portfolio and the plans we had, we were robust to a very wide range of prices. The fact that the Chemical margins are as good as they are today indicates that that breakeven has come down. Frankly, we’re not really sharpening our pencils on that because we’ve got a plan, and the foundations of that plan haven’t changed. I think we feel better about the position that we’re in today, given where the market is at. We’ll take advantage of it while it’s here. Our plans aren’t based on those sustaining themselves. As I said, we will pay down the debt and deleverage faster, given the help we’re getting from the market right now. That puts us in a stronger position for the future.

Okay. I figured I’d give it a shot. My second question is on CapEx. So, for the ‘21 budget, Q1 was in line with your plan. You reiterated the $16 billion to $19 billion for the year. I’m not sure if I missed it somewhere, but are you still targeting the lower half of the range, given what you’re seeing on the macro performance? For example, in the Permian, you slightly raised your production guidance only slightly. But is that based on the same level of activity that you originally forecasted? Are you going faster than expected? We saw in the slide, you cited the performance improvement. But some of those performance improvements would indicate that you are going faster, so you could be doing more activity. So, just wanted an update on if you’re still thinking about the lower half for the year.

Yes. So, I think the guidance that we gave was $16 billion to $19 billion. As I said in my prepared remarks, that has not changed. What I said during the Investor Day is that I expect to be on the lower end of that range, and that expectation remains today. They’re not necessarily targets. We have a plan that the business is executing, and that plan includes a spend level. That spend level has not changed. What we’re seeing in the Permian and the point that I tried to make in the slide in the prepared remarks is what’s changed really is the progress that the improvements that that business is making. What the chart shows you is really impressive performance. I believe in reorganizing and better leveraging our technology, better leveraging the competencies of the entire organization in this very important resource that we would see significant improvements with time. I think I’ve been talking about that for several years. What that organization is demonstrating is, indeed, they are making improvements and making them at a faster rate than we had planned. That update with the production is a function of that performance improvement. We have not increased the capital allocation to that business. They’re running at their planned spend. That plan is across the full year, and that number will change over the year based on their plan.

My first question is a bit of a follow-up on the capital spending. Obviously, the run rate in the first quarter is very low, and you’re expecting the full year to be towards the lower end of the range, so call it, $16 billion to $17 billion. You have the $20 billion to $25 billion target out there for the long term, which would obviously be still a pretty big step up from, say, $16 billion to $17 billion. So, just more intermediate term, as we think out to, say, 2022, should we think of the spending being more gradual in terms of the ramp back up, in terms of getting to the 20, 25 long term? Just any color there would be helpful. Thank you.

Sure. It’s important to note that we have laid out our plan, which extends through 2025 and includes specific numbers. We are not managing the business based on ranges; instead, we have concrete plans. These ranges acknowledge the complexity of our business and the various factors that influence our projects. While we cannot pinpoint exactly when each element will align, we have a solid foundation, which is our plan. The ranges we are presenting illustrate how these components typically come together within any given quarter or year, providing us with the necessary flexibility. We are not uncertain about where we will fall within that range because we have established plans that guide us. I want to emphasize that we remain committed to fulfilling those plans. Regarding spending, we developed and reviewed these plans with the Board in October and finalized them in November before the release. During the October timeframe, considering the prevailing prices and the uncertainty of future market conditions, we were aware of an impending recovery but finding precise timing was challenging. Our plans became more back-end loaded. The figures for the first quarter are lower than what might reflect a steady run rate as we foreseen a more difficult environment, but we expect a ramp-up. Additionally, I want to highlight the effective work of our project organization on pace projects.

Okay. Got it. Thank you. My second question would just be coming back to the Gulf Coast carbon capture opportunity. I’m frequently asked about whether this would be more of just an opportunity to reduce your own GHG emissions, or is it something where it can be a third-party business that’s actually a long-term earnings driver for the Company. So, I’m curious how you would answer that.

I’d say yes. I think that project has opportunities to do both. What we’ve been talking about for some time is the work we’ve been investing in respect to technologies to bring down the cost of the technologies that we believe will be required to achieve that. All this was happening with a view of what I would say is a business opportunity to meet an evolving demand of society, which is a reduction in CO2. That’s a new business and demand for that society, which is a strong desire for. We’re at the early stages of a new business. What we put out there is the opportunity to leverage our skills, competencies we've developed over decades in bringing new ventures to market, working with governments and leveraging our own capabilities. This Houston Ship Channel represents exactly that. We’d be working with a number of companies and industries there, collaborating with others and working with the government. Our own facilities would be involved in that. It’s a mix of opportunities: to reduce our own emissions, an opportunity for others to contribute at scale and cost-effectively reduce their emissions, and then potentially, there is an emerging market for CO2 reduction credits as well. It’s early to lay all that out, but we think the fundamentals are there.

And Phil, I guess I’d add. What we’re also seeing is policies being established in other parts of the world where we look at Europe, over in the Asia Pacific region that are interested in doing similar types of efforts to decarbonize these hard-to-decarbonize sectors of the industry.

I also have two questions, if that’s okay.

Sure.

Darren, during the Analyst Day, you mentioned something about 250,000 barrels of oil equivalent of disposal impacts in your five-year plan. I understand you've moved away from the UK, but could you update us on whether the pace is increasing in this stronger oil price environment and how you foresee that developing?

Sure, Doug. Thanks for the question. I’d say we laid that plan out quite some time ago. Neil talked about the work we had been doing in assessing the portfolio and upgrading that portfolio. Two levers to that are additional investments in bringing in more profitable lower-cost production opportunities and working on some of the tail items in our portfolio to see if others put a higher value on them, particularly given how rich the new opportunities are for us. That portfolio of opportunities remains. We’ve been out actively marketing a number of those, and as you can imagine, last year really slowed that pace down just because of the number of buyers. What I’d say today is we’re continuing that activity on those assets, and the work we did in 2020 puts us in a really good position this year. We did not compromise the value that we expected to achieve, which slowed things down, but I think as we go into this year, there’s a different view being taken on the future and the horizon and the price environment, which is generating more interest. There’s a same set of assets, a lot more interest and discussions happening. We’ll see if we can find the right buyer and settle on a value that’s kind of a win-win proposition, and that work goes on. I’m optimistic that we’ll see that accelerate a bit. It’ll be accelerated based on a lot of work that’s already happened and will continue to happen.

Great. I appreciate that. My follow-up is really more of a philosophical question, Darren. I guess, a year ago, your yield was getting up there. You could see uncompetitive levels in terms of if you ever wanted to do anything in your equity. It’s obviously a consolidation question. You’ve got a fantastic organic portfolio, and some of your peers are now starting with an investment case, you could argue, meaning growth is off the table for investors for at least on EVs. When you rack all that together, I’m just wondering how does Exxon think about participating or not in consolidation, whether it be Permian or whether it be international.

Well, I would say we have a very strong organic portfolio. I think that gives us a lot of flexibility where we don’t have to go out and transact and look at acquisitions or mergers. But I’d also tell you that at the end of the day, we’re focused on maximizing our growth in shareholder value, keeping a firm eye on the opportunity set. If things develop, if market conditions drive an opportunity that would be accretive and consistent with the existing portfolio and our capital allocation priorities, then that would certainly be an opportunity we’d look at. I don’t think we take anything off the table when it comes to thinking about the future and how we might leverage our capacities. If we find someone where we can find some synergies with their capabilities and ours to take advantage of that and together grow value at a rate faster than we can organically. But I’ll end where I started: we feel good about our portfolio. Whatever we do is going to have to compete with that attractive portfolio. We feel real good about that. We’ll keep an eye open, but it’s nice not to be in a position where we have to do something.

Good morning, guys. And Darren, thanks for coming on these calls. I know investors value the transparency. Hopefully, you can keep this up regularly, not just once a year. I guess, my first question is just on the Board changes. Exxon has announced some changes to Board representation. You’re obviously in the middle of a proxy contest going into the shareholder meeting. Can you just talk about, from your perspective, Darren, why you think that the current set of Boards represents the interest of shareholders and some of the changes that you made and what these changes can deliver for the shareholder?

Yes, good morning, Neil. I’d like to start by noting that this is my second appearance on the call this year, which is an increase from the annual engagement previously. Regarding the Board, since taking on this role, I have been actively engaging with shareholders, listening to their insights and incorporating their feedback. You may have noticed a shift in how we interact with shareholders, including you and your community. We are committed to acting on the feedback we receive. Every decision made by the Board about new directors, including the six we've added since I became chair in 2017, has been based on shareholder input. We continuously discuss the competencies and skills our Company needs to navigate the future successfully. If you look at our current Board and how the Board Affairs Committee manages the selection process, it's clear that we are overseeing a large, global business that operates across various complex sectors and faces numerous challenges in different regions. We ensure that new Board members bring the necessary perspectives and experience in managing global enterprises.

Thanks so much, Darren. The follow-up question is just on slide 16. As you think about your growth projects, you talked a little bit about Guyana. Can you just flush out more just how big do you see this asset becoming over time? What are the next big milestones we should be looking out for? You didn’t mention greenfield LNG projects. As you think about those in the Q, where do those stand in terms of the projects that you’d look to move forward over the next five years?

Sure. I would think with Guyana, with respect to the potential of that resource base, we’ve talked about 9 billion oil equivalent barrels. I would tell you that is the current estimate and I would expect it to grow. The recent announcement we made with Uaru-2 confirmed a deeper play, suggestive of additional opportunities and resources that we haven’t fully quantified yet. So, I think it’s a rich set of opportunities that we’re going to continue to progress. I wouldn’t look for a big bang; I would look for a steady progression of bringing those opportunities to market. We’ve laid out a plan that’s consistent with that, working closely with the government and the people of Guyana to progress that resource, and really bring a lot of economic opportunity to the country and the people of Guyana. We’re beginning to see the benefits manifest themselves and will continue to contribute on a ratable basis. We’re talking about a potential for 7 to 10 FPSOs and 6 projects online by 2027. We feel good about what we’re finding in Guyana and have very constructive engagement with the government in terms of those developments. With respect to LNG, gas is going to continue to play an important role. As economies around the world develop, populations grow, people’s standards of living grow, this all requires power generation, and gas will play an important role, particularly as it’s a good substitute for coal and has much lower emissions. It has potential with time to make hydrogen as well. I think gas will continue to be an important part as economies grow and as we move into a lower carbon future. In that context, the LNG opportunities remain an important part of our portfolio. We continue to work closely with governments to build on our portfolio and expand opportunities, doing so to benefit countries and communities while being attractive to us.

Thank you, Darren, for participating. I want to thank the audience for your time and thoughtful questions this morning. We appreciate your interest and the opportunity to highlight our first quarter results. I hope you enjoy the rest of your day. Thank you. And please be safe.