Exxon Mobil Corp (XOM) — Q3 2022 Earnings Call Transcript

Good morning, everyone. Thanks for joining our third quarter earnings call today at our new time of 7:30 a.m. Central. I'm Jennifer Driscoll, Vice President, Investor Relations. Joining me are Darren Woods, Chairman and Chief Executive Officer; and Kathy Mikells, Senior Vice President and Chief Financial Officer. This live presentation, our prerecorded remarks and the news release are available on the Investor Relations section of our website. Shortly, Darren will provide brief opening comments and reference a few slides from the prerecorded presentation. This allows us more time for questions before we conclude at 8:30 a.m. Central Time. During the presentation, we'll make forward-looking statements, which are subject to risks and uncertainties. We encourage you to read our cautionary statement on Slide 2. For additional information on the risks and uncertainties that apply to these comments, please refer to our most recent Form 10-Ks and 10-Qs. Please note, we also provided supplemental information at the end of our earnings slides. Now please turn to Slide 3, and I'll turn it over to Darren.

Thanks, Jennifer. Good morning, everyone. Before covering our earnings highlights, I want to begin by recognizing the men and women of ExxonMobil. While this quarter's results were clearly helped by a favorable market, the fact is we're in this position because of the hard work and commitment of our people over the past few years. Where others pulled back in the face of uncertainty and a historic slowdown, retreating and retrenching, this company moved forward, continuing to invest and build to help meet the demands we see today and position the company for long-term success in each of our businesses. We understand how important our role is in providing the energy and products the world needs. And while the market has clearly been a factor, the results we report today reflect that deep commitment. I mentioned this because it is at the heart of our company and its culture. We know the role we play and are incredibly proud of it. We work together as a team, confident in our mission and determined to do our part in meeting the world's energy needs and leading the way in a thoughtful energy transition. Overall, I'm pleased with our third quarter operational and financial results. Higher natural gas realizations, strong refinery throughput, robust refining margins, and rigorous cost control drove our earnings improvement. We continue to increase production to address the needs of consumers, which contributed to earnings and cash flow growth, a stronger balance sheet, and significant value creation. Our results also reflected the outstanding work of our teams across the world who operate our facilities reliably at high utilization rates. Let me highlight a few examples of our progress. First, Energy Products. We boosted overall refinery throughput to its highest quarterly level since 2008, responding to tight market conditions. And we continue to make progress on the Beaumont refinery expansion, which will increase capacity by about 250,000 barrels per day in the first quarter of 2023. We also increased production from our high-return assets in the Permian and Guyana. Our production in the Permian Basin reached nearly 560,000 oil equivalent barrels per day, building on our strong growth from last year. We grew our production in Guyana to 360,000 barrels per day during the third quarter, with Liza Phase 1 and 2, both exceeding design capacity. We also had continued exploration success with 2 additional discoveries in the quarter. Earlier this month, first LNG production was achieved from Mozambique's Coral South floating LNG development, contributing new supply amid growing demand for LNG globally. We continue to expect total upstream production of 3.7 million oil equivalent barrels per day for the year. Looking longer term, we remain on track to grow low-cost production and meet our 2027 plan, with more than 90% of our Upstream investments generating over 10% returns at $35 per barrel. Our ability to increase production while reducing costs improves our competitive position, benefits consumers, and generates capital to fund meaningful investments, demonstrated by one of our recent press releases, announcing that our low carbon solutions business signed its first and the largest of its kind customer contract to capture and store up to 2 million metric tons per year of CO2. This marks an important milestone in developing our newest business. It's also a good example of how we're supporting other companies in reducing their greenhouse gas emissions. We look forward to sharing more about our progress in developing attractive low-carbon solutions business in December as part of our corporate plan discussions. We continue to actively manage our portfolio, announcing the sale of our interest in the Aera oil production operations in California and our refinery in Billings, Montana. Proceeds from divestments completed year-to-date totaled $4 billion as we captured incremental value for these noncore assets in today's higher price environment. These sales enable us to concentrate on our higher-value advantaged assets. Finally, you may have heard earlier this month that with 2 decrees, the Russian government has unilaterally terminated ExxonMobil's interest in Sakhalin-1 and transferred the project to a Russian operator. In March, we stated our intention to exit the Sakhalin-1 project and discontinue our role as operator and took an impairment of approximately $3.4 billion at the time. While our affiliate was in force majeure due to the unprecedented impact of global sanctions, we continued to make every attempt to engage in good faith discussions with the Russian government and all Sakhalin-1 partners to effect a smooth exit to the benefit of all parties. Our priority all along has been to protect employees, the environment, and the integrity of operations at the facility. While the recent decrees violate our rights in Russia established by our production sharing agreement and interrupted the exit process we were working, it did not prevent us from safely winding down our operations. We're proud of our employees and the many significant achievements they led since 1996, including the most recent challenge of the government takeover. We do not anticipate any new material costs associated with the exit. This next slide illustrates the variability the industry is experiencing across the markets most relevant to our business. In the third quarter, crude prices moved back within the upper end of the 10-year range as higher supply slightly exceeded demand. Natural gas prices rose to record levels in the third quarter, reflecting concerns in Europe about the withdrawal of Russian supply as well as efforts to build inventory ahead of winter. While natural gas prices recently moderated, they remain well above the 10-year historical range. In the U.S., prices increased by about 15%, driven by higher summer cooling demand and inventory concerns. Refining margins remained well above the 10-year range due to inflated diesel crack spreads, resulting from expensive natural gas and high demand for diesel. Higher refinery runs and flat demand for gasoline in the U.S. resulted in refining margins declining from the second quarter. In contrast, global chemical margins fell below the bottom of the 10-year range, reflecting weakening global demand. Margins in North America and Europe have softened, with regional pricing moving closer to global parity as demand and logistics constraints relaxed. Asia Pacific remained in bottom-of-cycle conditions as COVID restrictions continue to suppress demand in China. Despite these challenges, our chemical products business delivered another solid quarter on improved product mix, strong reliability, and good cost control. Before leaving this chart, I want to make one other very important point, the value of a diversified portfolio. With just the 3 quarters shown, you can see how the value has shifted across our different businesses. Our diversified portfolio has served us well during the volatile swings in prices and margins across the various businesses. As the energy system evolves along an uncertain path, the investments in our broad portfolio of advantaged businesses, including our Low Carbon Solutions business will play an even more important role in capturing value in outperforming competition in the very near term, and across a much longer time horizon. Before I turn it over to Jennifer, let me recap our key takeaways on the quarter. We continue to progress our advantaged investments, drove additional structural efficiencies and created sustainable solutions that deliver the energy and products everyone needs. This has resulted in strong earnings growth, bolstered by higher refining throughput and cost control which more than offset margin declines. We've continued to strengthen our industry-leading portfolio and increased production from our high-return assets in Guyana and the Permian. In addition, earlier this month, our low carbon solutions business signed the largest-of-its-kind customer contract to capture and store up to 2 million metric tons per year of CO2. This is a strong indication of the growth opportunity we have in this new business. We've also continued to actively manage our portfolio, announcing the Aera Upstream and Billings refinery divestments and closing the sales of our Romanian Upstream affiliate and XTO Energy Canada. Our diversified portfolio of advantaged businesses and robust balance sheet provide a strong foundation to invest in value-accretive projects and drive attractive shareholder returns through the cycle. In aggregate, the work we are doing today is delivering critical products in a very short market. Longer-term, we're delivering improvements that strengthen our structural advantages, meet society's growing needs for energy and modern products, reduce greenhouse gas emissions and double earnings and cash flow by 2027 versus 2019. In short, profitably leading our industry toward a net-zero future. Thank you.

Thank you, Darren. Before we start our Q&A session, I have two important announcements to share with you all. Please mark your calendar for our annual Corporate Plan Update scheduled for Thursday, December 8 at 8:30 a.m. Central Standard Time, where I'll be joined by Kathy Mikells to share the details of our corporate plan. Additionally, please keep an eye out for our 2022 Advancing Climate Solutions report. We expect to publish it online in mid-December. Now with that, we'll begin our Q&A session. I'll turn it back to you, Katie.

So they were very strong results this quarter in the Downstream business, and you called out throughput, volume and mix as some of the factors there. But I was wondering if you could talk a little bit more in detail about some of the drivers here. And then just more broadly, there's a lot of moving pieces in the macro picture at the moment of demand, SPR drives, China reopening, the EU embargo on Russian crude, just to name a few. I was wondering if you could talk a little bit more about your outlook for refining as we head into next year as well.

Sure. Why don't I take the first question and maybe give you the macro. So if you look overall at our energy products business, obviously, it was a really strong quarter. That was really, from our perspective, led by the volume increases we saw. So we had record North American throughput. We had across the globe, the best results on throughput that we had seen since 2008. And so if you look at the earnings bridge in terms of what happened quarter-to-quarter, that was worth almost $1 billion in improvement as a big driver in the results for energy products. If you then look at what's going on in margins, obviously, margins softened in the quarter. They still remain well above what the 10-year average would be. If we look at those softer margins, they were really driven by downward pressure in gasoline margins due to lower-than-usual summer demand, specifically in the U.S. Diesel demand is continuing to be strong. We then had some offsets to that pressure that we saw on margin. And specifically, if you look at some of the positive offsets we saw, we saw favorable timing-driven impacts. We try to separate this, so you can see it. Part of that was just mark-to-market on our open derivative portfolio, that was worth about $250 million favorable impact in the quarter. Other price timing impacts were worth about $600 million favorable impact in the quarter. That was driven by derivatives we use to ensure ratable pricing of refinery crude runs. So if you put that to the side, we delivered about $5 billion in earnings outside of those price timing benefits in the quarter. And in addition to the other offsets for softening refining margins, we saw very strong aromatics margins. We did a good job on revenue management, so we saw positive benefits there. And then overall, I would say, end-to-end, supply chain optimization, right, both through procurement and logistics and trading benefits on top of that. That's really embedded in the base business. And so we expect to see benefits out of those areas. They're not always ratable every quarter. But if you look over time, those benefits clearly accrue to the business.

Yes. And I'd just add, Devin, maybe a couple of points on top of what Kathy just explained. If you step back, you'll recall that we, in 2018, came up with a value chain concept that we're using in the Downstream and really looking to optimize from crude coming in the gate all the way to products being delivered at our customers' doorstep. And the work the organization has been doing to optimize that value chain has resulted in additional value, and I think continues to make that business much more robust than what I would say the industry average is. Kathy mentioned the trading, which has become an integral part of that value chain optimization step. And then I would add finally that a lot of work has been going into making sure that we are positioning those facilities and our Downstream in our refineries to be robust to an evolving demand landscape. And so if you look at where we are investing in refining, it's for sites that have integrated chemicals, lubricants, and fast-growing clean fuels business. And we think that gives us a structural advantage versus the broader industry. This has been and always has been a thin-margin business. And so you typically scratch through the thin low periods, which last for a very long time and then take advantage of some of the highs. And as a result of that thin margin business, if you look over time, certainly in the West, refining capacity has been on the decline. We actually showed a chart last quarter and again this quarter that shows that drop in refining capacity. If you look at some of the windfall taxes that are being talked about within Europe, that's going to put additional pressure on refining margins. So there is certainly a scenario out there that says we continue to see under-investment in refining, we continue to see that capacity coming out of the market. And then depending on the build side of the equation and how much capacity gets built out in the Middle East, we could see tight markets for some time to come. Of course, we don't plan for that. We plan for thin margins and very tough conditions and then hope for the best.

Good morning and thanks for taking our questions. For our question and only question, bad habit here, it's on the balance sheet and cash returns. So I guess gross debt to cap now is just below the target range. Cash is now at $30 billion, which is at the top end of, I believe, the $20 billion to $30 billion level that you cited before that you want to maintain over time. So I guess what are the implications on the trajectory of the buyback? And how are you really viewing the trade-off between potentially accelerating buyback sooner rather than later, given just the mechanical synergies of the dividend and then just being more aggressive on dividend increases, and there was a nice bump announced this morning to the dividend.

Sure. First, I'd like to say that our capital allocation priorities remain consistent, and we are executing effectively. We need to continue investing in the business since it's a long-cycle business, and maintaining consistency is essential. We are actively looking for opportunities for accretive acquisitions and are disciplined in that regard. Recently, we've pursued several divestitures in a favorable market for such activity. We're focused on maintaining a strong balance sheet that provides us the flexibility to navigate through economic cycles and prepare for any downturns. Additionally, we’re committed to sharing our success with shareholders while striving for a balanced approach. As you mentioned, we increased our quarterly dividend by $0.03, which will be reflected in the upcoming fourth quarter dividend. We're also in the middle of a share repurchase program of up to $30 billion through 2023, and we’re on track to complete $15 billion of that by the end of the year. So far, we've accomplished about $10.5 billion in share repurchases through the third quarter. By the end of the year, we expect to return approximately $15 billion in dividends and another $15 billion through share repurchases, which I believe offers a balanced return to our shareholders. This strategy places us ahead of our peers in returning excess cash. We're keeping an eye on our cash balance, which was about $30 billion at the end of the quarter. Depending on market conditions, this balance may increase slightly. We will continue discussions with our Board regarding the share repurchase program, but for now, we're focused on executing our current plan.

Darren, could you share your thoughts on a broader issue? You recently met with the administration along with some of your peers regarding several topics. It seems that the only group that might not be pleased with your results this morning could be the administration. Can you discuss any concerns you have regarding potential risks from legislators, such as export bans on products, especially considering how strong your Downstream profitability was this morning?

Yes. Doug, I'm going to probably pass on trying to predict where different governments or administrations here in the U.S. are going to go with respect to policy. We've been very explicit, I think, me, along with many of the peers in the industry around what I would say are the mechanics and the fundamentals of our industry and how it works and the implications for some of the policies being considered. And I would say that in the short term, it may solve a political problem, but it will carry all the policies that I've heard people talking about, the export bans in particular, windfall profit tax. Those will carry significant long-term negative consequences. And it's just a question of, I think, how they balance out the political equation versus what I would say are some of those fundamentals. For me, personally, for the company, what I would say is I feel like we're well positioned. Obviously, it would be a disadvantage to the industry. But I think within that disadvantage, we would find, because of our footprint, because of our diversification, an ability to position ourselves competitively with whatever policy comes down the road. And so our focus is really making sure people understand what the potential consequences of some of these policies are being considered. And then in parallel with that, obviously, staying very focused on where I think the root cause or the root issue here is making sure that people all around the world and here in the U.S. get affordable and reliable energy. We recognize the pain that high prices cause. Unfortunately, the market that we're in today is a function of many of the policies and some of the narrative that's floated around in the past. And we basically have been working to make sure that when needed, when the products were required, which we anticipated, you'll recall back in 2020, we made the point that the industry is under-investing. We continue to lean into the investments to spend at a rate higher than the rest of the industry, so that when the call came, we would be there to answer. And I think the results you've seen here in the third quarter is exactly that. Those investments are paying off. We've grown our production, both in the Upstream and are growing our production in Downstream and refining business with the expansion in Beaumont and then a real focus on reliability and high throughput. And so we keep trying to reiterate that, that we're doing what we can within the boundaries of what's available to us today. And then longer term, we are making the investments that are good for the administration's constituents and good for our business.

Darren, I would love your perspective on M&A and just how you see that fitting into the go-forward framework and specifically, around upstream consolidation but also low-carbon consolidation as you've said that you want to grow that business over time to be the size of the refining and chemicals business.

Sure. Neil, as you know, we've talked about this over the years quite a bit. And I would tell you that the whole M&A space and divestment space is something that we are constantly working. Obviously, our strategy, which you've seen us execute over the last several years is buy low, sell high. That's kind of what we're doing. We laid out a divestment program, but we took our time and were patient, waiting for market conditions to develop that would favor us as sellers. And that's what you've seen transacting here; likewise, as we look at acquisitions and opportunities constantly in the market, thinking about that and looking for it. But we've got to find opportunities where we can see a clear synergy and develop a clear competitive advantage so that we bring some unique value to the transaction. And we're evaluating and looking at that in our traditional business so I think with time, those will show up, but we'll be very selective and strategic around that. And I would say, we'll do it when the market conditions are favorable for doing that. On the Low Carbon Solutions, I think longer term, the concept sounds good in terms of M&A. But I would just put that in the context of this is a very immature market. And so there aren't a lot of established businesses out there today that have what it takes to be successful in this space. If you think about starting an industry from scratch and what's required in terms of policy regulation, investment, connecting all the different pieces of a brand-new value chain, that's a complicated equation and fortunately, one that we think plays to our strengths. And the recent deal that we announced with CF Industries, for us, really demonstrated that in terms of the complexity of putting together each element of that value chain to successfully come up with a deal that's value accretive and it generates profits. And it's good for the planet, it's good for our shareholders. And so I don't know how much we'll see how that develops. I would think in the M&A space, we may, over time, see opportunities that we can uniquely leverage and then we'll bring those into the portfolio when they make sense to do that.

Darren, I appreciate the information provided about the CF Industries project. I'm curious if you could discuss the timing of the announcement following the passage of the IRA. Additionally, what policy changes are necessary to enhance the abatement curve and accelerate project development? In your prepared remarks, you also mentioned ongoing challenges with permitting. Could you clarify whether these issues arise at the local or state level, and where they are most prominent? Lastly, how should investors evaluate the returns on these projects, taking into account the policy environment and associated risks compared to traditional Upstream or Downstream projects?

Certainly. To begin with your first point regarding timing, while the IRA has certainly bolstered the value proposition, it's important to note that the project and deal were in progress much earlier and could operate under the existing policy. The new policy, of course, enhances it. The IRA effectively expands the potential for cost-effective CO2 capture or avoidance. When considering the challenges of capturing and sequestering CO2, key factors include the concentration of CO2; more dilute streams are pricier to capture, necessitating greater incentives. The IRA allows for the economic pursuit of more diluted streams, thereby broadening opportunities. Additionally, the distance to sequestration sites and associated transportation costs are crucial; greater distances escalate costs, and the IRA aids in addressing this issue. There are also incentives for hydrogen production and direct air capture. While these developments will certainly help, achieving net-zero emissions will require the capture of many dilute streams, which are costly, indicating a need for further incentives—either through market developments for CO2 or additional policy supports. At this stage, we're still in the early phases of the project. We have economic incentives and a forward path but face significant work ahead, including obtaining permits for CO2 storage and extending the pipeline. There are various regulatory steps to navigate, and we are collaborating with the government to streamline these processes for an expedited project timeline that aims to significantly reduce emissions—analogous to removing 700,000 vehicles from the road. From a return perspective, we are committed to positioning ourselves competitively within the industry. We aim to leverage our strengths to ensure that we secure higher returns on our projects. CF Industries, for instance, is an accretive project that enhances our profitability while achieving CO2 reduction. We believe several similar opportunities exist, and Dan's Low Carbon Solutions business is actively seeking unique prospects that can deliver returns exceeding the industry's average. We are optimistic about the scope of opportunities in this space.

My question is about your gas realizations, which are a huge driver on the quarter. Would you characterize those as contractual or more optimization-driven? And then this is an addendum, but I think the seasonality of the gas market has changed a little bit because Europe has very high demand in the summer now because of a storage imperative. And so I wonder if you see that as a structural change to the global gas market and if it means anything for your investment prerogatives on the LNG chain or even in the U.S. within gas because we're going to be exporting a lot. So that's the question.

Yes, that's fine. I'll jump in, and Darren can add if he has anything. Overall, if you look at our results, we saw strong gas realizations, but we have an overall portfolio that's 60% gas, 40% LNG. The LNG tends to be tied to crude-related prices with a 3- to 6-month lag. So we're seeing the benefit of that lag now kind of coming through our results. Overall, from a demand perspective, you're obviously seeing a really tight market. We saw in Europe, the building of inventory and how that has driven prices in Europe, building of inventory ahead of the winter. And so structurally, we would say there's going to continue to be a tight market until supply and demand comes into equilibrium, right, in that there's only 2 ways that happen, either more supply or reduced demand and supply, especially supply of LNG does take time to bring online. It isn't something that is just a spigot that can be turned on overnight. The market is obviously responding to that. We obviously have projects that are bringing more LNG online. Darren mentioned Mozambique, the Coral project reaching first gas production. Recently, we've got Golden Pass, which is going to be coming online in 2024. So we have investments that will bring more capacity online, and the industry is responding to this, but it is going to take some time. So I'd say as we look at that seasonality, we're always mindful of what's happening in terms of inventories and when inventories are being built or being drawn and what that means in terms of near-term market conditions. And so it's something we always keep an eye on.

I would just add that once we get through this period of building inventories and dealing with supply shortages, we will lose some of the seasonality. However, as we approach a more balanced situation, which I believe will take about two to three years, we will begin to see that seasonality return in more stable markets. Our long-term perspective on gas has always been that it will be crucial for world economies for the foreseeable future. Initially, it will be used for power generation as a replacement for coal, which is one of the major advantages of gas today. Over the long term, as we tackle emissions and transition the energy system, gas will also play a role in producing ammonia and hydrogen, alongside carbon capture. This transition allows for the use of lower emissions fuels while addressing CO2 emissions. Our stance remains that there will be a fundamental demand for gas for a significant period. We are positioning ourselves to ensure that the projects we develop bring natural gas in a cost-effective manner. We will continue to focus on remaining competitive across any price scenarios we can foresee. Our approach to this hasn’t changed.

Could you clarify the timing of the dividend raise? In the past couple of years, it was aligned with 1Q earnings, but now it seems to be with 3Q earnings. Is this a shift in timing? Additionally, regarding the Chemicals outlook, you've noted some market weakening. How do you foresee that market evolving in the next 6 to 12 months? Will there be additional supply coming online, more demand weakness, or will conditions become tighter?

Yes, I'll take the quick question on the dividend. We would have raised the dividend at the same time last year. One of the things I would mention is this is the 40th consecutive year where we've had an annual dividend increase. But we don't have a specific timing determined at any given point of the year in terms of when we make this decision. We look at it over time. We're obviously focused on having a competitive, sustainable, growing dividend over time. We know how important it is to shareholders and roughly 40% of our shareholders are consumers, and we know those people are very much focused on the dividend.

In the third quarter, we noted softer demand in the Chemicals sector, which is largely due to the ongoing effects of COVID lockdowns in China. We are closely monitoring the situation in China, as its recovery will significantly impact our margins and the supply-demand balance moving forward. Additionally, as we look beyond China, we see that Europe is facing energy challenges that will likely lead to slower economic activity compared to historical trends, which could affect demand. In the U.S., there is a sense of uncertainty; the softness we observed in the third quarter can be attributed to customers reducing their inventory levels as they prepare for future scenarios and potential downturns. It's difficult to predict what will happen next, and we will need to observe how the fourth quarter unfolds. However, in the short term, we anticipate a considerable reduction in inventories, and the long-term outlook will depend on overall economic activity.

And then just one other thing I'd mention, we certainly see some industry supply that's coming on in the fourth quarter, and we commented on that just in terms of our look-forward expectations.

I just wanted to ask about the LNG portfolio again. Could you clarify what proportion of your LNG sales are under long-term contracts and what proportion are sold on a spot basis? The reason I asked is because your assets are performing extremely well in Qatar, Papua New Guinea, and Gorgon also. So I just wondered if that has allowed you to sell some incremental spot cargo. So what proportion is under long-term contract? And if I could sneak a second one in, has there been a change to the 2022 Permian production kind of guidance in terms of growth? It looks slightly light relative to at least what I had in. So I was wondering if anything has changed there.

In our LNG portfolio, approximately 80% of our volumes are under long-term contracts, and we are currently benefiting from the timing lag associated with these contracts. The pricing is generally linked to crude oil prices but experiences a lag of about 3 to 6 months. We are now seeing this advantage reflected in our realizations.

Yes, I would say on the Permian, one of the challenges there is over the years, what we've been doing is working really hard to make sure we're maximizing the recovery of that resource. And I think we've talked before about some of the technology that we're bringing to bear to make sure that we are doing that in the most cost-advantaged way. Obviously, as we go through that, we're optimizing and adjusting our development plans. That continues to be the case. So I expect this year, we'll probably come in at about 20% up on last year's growth, which was up 25% from the year before. So still very solid growth in the Permian. And if you look more broadly, we expect basically to meet the objectives that we talked about at the beginning of the year on overall production. If you look at what we had talked about at the beginning of the year for total production this year and where we'll end up, the delta there of about 100,000 barrels a day is really all driven by price entitlements and the fact that we're in much higher price environment. So we feel pretty good about the production growth that we're seeing across the portfolio. We've talked about the record production in the Permian, and Guyana is obviously performing very, very well with both of those boats running at above capacity.

Kathy, I'd like to revisit the initial question regarding energy products. In the 8-K issued at the end of the quarter, you indicated that industry margins would be a significant headwind of nearly $3 billion. However, your current analysis shows that you've only experienced about half of that impact. I am curious about why there seems to be such a large disparity between new industry margins, the indicator margins, and your realized margins. What aspects of your portfolio do you believe are enabling you to achieve such results?

Yes. Our impact from, I'd say, straight-up refining margins came in kind of right in the middle of the range that we provided for the 8-K. And so beyond that, I mentioned we're seeing a positive impact beyond refining margins and aromatics margins, overall revenue management. And then end-to-end supply chain optimization and efficiency, which would include trading profit benefits. And so I'd say, if you look at quarter-to-quarter, what we've seen in energy products during the year, there's been a lot of volatility that's been basically tagged to the moving price environment. If you look at that over a longer period of time, say, year-to-date, it looks, I would say, pretty normalized. And then we try to give you information on things that were price timing stuff that occurred in the quarter, but over time, we would expect to be pretty neutral. And so I mentioned specifically the program that we have, that we use derivatives to basically ensure ratable pricing of refinery crude run. Over time, we'd expect that to be neutral. You would have seen in the price timing impacts that that was about a $600 million favorable impact for the quarter. So I'd say what goes on in terms of overall supply chain optimization and how we're trading around our physical footprint, doesn't come through our results ratably every quarter. This quarter, it was obviously a lot stronger. But if you look at it over a long period of time, that benefit that's embedded in the business clearly shows through.

Do you think going forward in the 8-K, you would expect to be closer to that industry margin?

It's really going to depend on the price environment and the performance of our trading portfolio in the fourth quarter. Overall, the significant positive volume factor we experienced won't be reflected in our 8-K due to our exceptionally high throughput and utilization. To summarize, if we set aside the impacts of price timing, we would begin with about $5 billion in profit in energy products, and it will largely depend on how the market develops in the fourth quarter.

Yes, I would just add that the 8-K was really looking at what the market factors are. And then to the extent within the business, we're working hard to improve upon that through the optimization that Kathy mentioned through revenue management across that entire value chain and then trading. And as trading moves and with the accounting rules as that booking happens with time, that comes in less than ratable. We saw that in this margin bucket this quarter. And that will move around as we move forward depending on the price environment that we're in.

Most of mine were asked, but if you could just maybe talk about the status of the refinery strikes in France. I know you had a couple of facilities that were impacted there that I believe are ramping back up. Where are we now with those facilities? And when do you expect them back in full? And do you think it actually has a meaningful impact on your 4Q results for Downstream?

Yes. We reached an agreement with the workers some time ago, and those refineries are now undergoing the start-up process. When the refineries strike, we must shut those units down and remove the hydrocarbons. This is a thorough process to ensure the hydrocarbons are cleared. Restarting them involves a rigorous process to guarantee safety, which takes time. The organization is currently focused on this. I don't anticipate a significant impact. In a tight market, any offline capacity tends to elevate prices across the industry. However, there are considerations with our other refineries that are operational, which should help mitigate the overall effect. Therefore, I don't expect to see this reflected in our results.

Maybe if I could follow up on the Permian and your activity levels there. The expectations for U.S. supply growth in 2023, I would say, have probably been falling a little bit across the board, at least partially because of constraints across service providers. As you look towards your 2023 program, how much do you anticipate stepping up activity levels in the Permian to achieve that program? And if the market supports it, is there appetite or interest or even ability on your part to accelerate further? So how much activity increase is based into the program? And how tight do you see the market there in terms of your ability to kind of move around that?

Yes, I agree. The points you raise are valid. The market is indeed tight, and there is limited capacity across various stages needed to increase production. While this situation is expected to ease over time, the industry overall remains constrained. Each company will experience different levels of flexibility in this area. We possess some flexibility, but we are committed to our principle of ensuring our investments yield high returns at low prices. My interpretation of capital discipline involves spending wisely to achieve solid returns, even during downturns. We will adhere to this principle, and any additional spending must first and foremost meet the criteria of being resilient across various price scenarios, ensuring we would be satisfied regardless of current prices. We do have the ability and some leeway to pursue opportunities where they arise. However, if you examine the range of capital expenditures we've outlined in previous years, we've allowed for movement year to year. We are confident that our future plans align with those projected ranges. Kathy will provide more details on this in December when she presents the plan that will be approved by the Board next month.

Just curious that I don't actually record in the product, Exxon talked about trading is a major contributor to the result. Historically, I think the U.S. companies, such as you and tends to take a more conservative approach and trading compared to your European customers. So just curious, are we seeing the company having a somewhat change in the trading strategy going forward? Or that this is just a unique circumstance and that when we're talking about trading, what kind of trading are we referring to that is making a big contribution this quarter?

Yes, Paul, I'll discuss that and if Kathy has anything to add, she can jump in. As we've mentioned in the past, when we shifted to the value chain framework and combined our fuels marketing and refining organizations to optimize value throughout, the trading organization became a much more significant channel for optimization. Back in 2018, we decided to invest more in trading and adjust our approach to enhance optimization across our assets. You might remember our talks about asset-backed trading, which remains crucial for the Product Solutions business, especially within the Downstream segment and our Upstream crude activities. This organization has expanded over time and continues to fulfill its optimization role. This quarter, as Kathy pointed out, the accounting for trading can show variability from quarter to quarter. However, if we look at it from a longer perspective, we can see the value embedded within the businesses, which is indeed very much integrated into those operations. We do not separate it out since it stems from an asset-backed trading strategy. The value comes from trading as well as from operating all our refineries efficiently, maintaining product availability, and having the assets necessary to support arbitrage and trading activities that drive value. This quarter, we experienced significant price movements, resulting in a larger portion of that value being recognized. Over time, this will meaningfully contribute to the value equation in our Downstream value chain.

Yes. And then the only thing I would add to that is we are trying to also tell you that there are some impacts that over time, we expect to be neutral. So the fact that we use derivatives to ensure ratable pricing of our refinery crude runs sometimes that's going to give us a positive in a quarter. Sometimes that's going to give us a negative in the quarter. Over time, it should be neutral.

My quick question is just on costs. Specifically, could you all speak to your thoughts for 2023 on OFS inflation and other rising costs particularly in your 2 highest return areas, the Permian and Guyana?

Yes, Neal, I'll address that. We are certainly affected by the broad market trends everyone else is experiencing, including inflationary pressures in several of our sectors. It's important to note that during the pandemic's downturn, we made a concerted effort to work with our contracting partners, recognizing that we would eventually return to operating rigs and installing pipe. We aimed to secure contracts that aligned with that long-term vision, which has helped us manage some inflationary impacts. We established contracts during the downturn with commitments for future spending, which has been beneficial. Additionally, we've made significant organizational changes, consolidating our Upstream operations from over seven businesses to one and reorganizing for greater efficiency. By centralizing functions, we've aimed to leverage our scale and purchasing power while reducing costs. All of these initiatives to enhance efficiency and effectiveness are making a notable difference. We noted in our earnings release that we've achieved $6.4 billion in structural savings compared to 2019, and we're on track to meet our goal of $9 billion by the end of 2023. This is helping to counteract some of the inflationary pressures. Furthermore, through our centralized structure and better utilization of scale, we're realizing short-term efficiencies that assist in offsetting costs. We've committed to delivering on our expense budget for the year while managing inflation, and the organization is doing quite well in this regard. I believe we'll achieve our targets, and next year, we are focused on leveraging the opportunities from our restructuring to address inflationary challenges, and we'll push ourselves to maximize our efforts.

Katie, we have time for one more question.

Yes. Maybe just to follow up on the capacity question that was asked earlier, but rather than just focus on services capacity in a particular region or something like that, Darren, I was curious, if you look at tightness, be it LNG, refining, et cetera, what do you think it takes? Or do you believe that the capacity exists for the world to move forward and do what it needs to do over the next, say, 2 to 3 years to add capacity? Or do you see it as a situation where there probably is no other option but to curtail demand for some period of time? It's kind of a macro question, but you brought it up in the intro, and it's kind of picking at me here as to what's the way out of this maze.

Yes, I appreciate that, Roger. Historically, the industry has been quite adept at adjusting capacity to align with demand. I'm optimistic that over time, the market will rebalance itself, which we have demonstrated in the past, but it does depend on timing. In the short term, everyone will be maximizing their output. We are certainly doing our utmost to ensure reliable operations and meet market demand. Others in the industry are likely taking similar approaches. In the near term, the focus is on optimizing existing resources. However, the long-term solution lies in developing projects and keeping them on schedule. Fortunately, we have a robust pipeline of ongoing projects, so we are not seeking new initiatives at this moment. We are focused on executing our current pipeline. For instance, we recently brought Coral floating LNG online from Mozambique, which adds to our capacity. We are also advancing investments in Papua New Guinea and our large LNG export terminal at Golden Pass in the U.S., expected to come online in 2024. The capacity exists; it just takes time to complete these substantial projects. On the crude side, we are making good strides with new developments in Guyana, and we believe we can bring that project in ahead of schedule while also progressing subsequent projects. The challenge lies in efficient execution to ensure capital is spent wisely and projects are completed as quickly as possible, which is our current focus.

And then just the one thing I'd add is on the demand side, I think all companies that can are looking to conserve, especially LNG, so that it can be there for other use. So across our footprint in Europe, we've already kind of switched over 65% of our use of LNG to other fuel sources so that it can be there for other use. And I expect that other industry players are doing the same.

Thanks, Roger. Thanks, everybody, for your questions today. We will post the transcript of the Q&A session on our investor website early next week. Have a nice weekend, everyone, and let me turn it back to Katie to conclude our call. Katie?