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Chevron Corporation (NYSE:CVX)
Q1 2018 Earnings Conference Call
April 27, 2018, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, my name is Jonathan and I will be your conference facilitator today. Welcome to Chevron's first quarter 2018 earnings conference call. At this time, all participants start with us in only mode. After the speaker's remarks, there will be a question and answer session and instructions will be given at that time. If anyone should require assistance during the conference call, please press * then 0 on your touchtone telephone. As a reminder, this conference call is being recorded. I will now turn the conference call over to the Vice President and Chief Financial Officer, Ms. Pat Yarrington, please go ahead.

Pat Yarrington -- Vice President and Chief Financial Officer

Thank you, Jonathan. Welcome to Chevron's first quarter earnings conference call and webcast. On the call with me today is Mark Nelson, Vice President Midstream Strategy and Policy. Also joining us on the call are Frank Mount and Wayne Borduin, who are currently transitioning in the role of General Manager of Investor Relations. We will refer to the slides that are available on Chevron's website. Before we get started, please be reminded that this presentation contains estimates, projections, and other forward-looking statements. We ask that you review the cautionary statement here on slide 2.

Turning to slide 3 -- an overview of our financial performance. The company's first quarter earnings were $3.6 billion, or a $1.90 per diluted share. Earnings excluding foreign exchange and special items were also $3.6 billion. A reconciliation of special items and foreign exchange and other non-gap measures can be found in an appendix to this presentation. This is our strongest earnings result since the third quarter of 2014, when brand prices were above $100. For the current quarter, brand prices average $67 per barrel. Cash flow from operations for the quarter was $5 billion. Excluding working capital effects, cash flow from operations was $7.1 billion. At quarter end, debt balances stood at approximately $40 billion, which resulted in a headline debt ratio of 20.9% and a net debt ratio of 18.1%. During the first quarter, we paid $2.1 billion in dividends. We currently yield 3.6%.

Turning to slide 4, we are on track to deliver on our 2018 cash generation guidance from our recent analyst meeting. Cash flow from operations excluding working capital effects grew to $7.1 billion. Positive impacts from strong realizations and high-margin volume growth were partially upset by equity affiliate dividends that were about $1 billion lower than equity affiliate earnings. Cash capital expenditures for the quarter were $3 billion, approximately $300 million or 10% below first quarter 2017, as we continue to complete our major capital projects under construction and drive improved capital efficiency across our portfolio. The result, free cash flow, excluding working capital effects, was $4.2 billion, approximately $2.5 billion higher than the average quarter in 2017. Asset sell proceeds within the quarter were minimal. However, with the closing in April of the Elk Hills transaction and the anticipated closing of the sale of our Southern Africa downstream business later this year, we remain on track for asset sale proceeds of $1-3 billion in 2018.

Turning to slide 5, as many of you are aware, working capital effects impacts our business unevenly through the year. These impacts are, to a large degree, transitory. Because of this uneven pattern by quarter, many of you exclude working capital impacts from your models. However, while uneven by quarter, our pattern is fairly consistent year-to-year. The chart, drawn from this decade's average working capital impacts demonstrates a pattern. Normally, working capital is a cash penalty in the first and second quarters, followed by a cash benefit in the third and fourth quarters. The variation has, at times, been 2 to 3 times the quarterly averages shown. This rhythm is fairly consistent and mainly results from seasonal inventory bills and draws, as well as the timing of supplier, JV partner, and tax payment. We anticipate this year's pattern to be no different. If price levels general hold where they are today, we expect the majority of the $2.1 billion of working capital consumed during the first quarter to be release throughout the remainder of the year. The residual is expected to be mostly receivables related to both higher prices and higher production compared to 2017.

Turning to slide 6, first quarter 2018 results were approximately $950 million higher than first quarter 2017. Special items, primarily the absence of a first quarter 2017 gain from the sale of our Indonesian geothermal assets, coupled with a first quarter 2018 U.S. upstream asset impairment, decreased earnings by $720 million between periods. A swing in foreign exchange impacts increased earnings between the periods by $370 million. Upstream earnings, excluding special items and foreign exchange, increased around $2.2 billion between the period, mainly on improved realizations and higher liftings. Downstream earnings, excluding special items and foreign exchange, decreased by about $250 million, mostly due to an unfavorable swing and timing effects, and lower volumes largely from the sale of our Canadian asset. A variance in the other segment was primarily the result of the absence of prior years favorable corporate tax items. As we indicated previously, our guidance for the other segment is $2.4 billion in annual net charges, so quarterly results are likely to be non-ratable.

Turning now to slide 7, a beautiful chart, if I do say so myself. This compares results for the first quarter of 2018 with fourth quarter of 2017. First quarter results were approximately $530 million higher than the fourth quarter. Special items, mainly from the absence of the fourth quarter 2017 U.S. tax reform gain, decreased earnings between periods by approximately $2 billion, while a swing in foreign exchange impacts increased earnings by $225 million between the period. Upstream results excluding special items and foreign exchange, increased by around $1.4 billion between quarters, primarily reflecting higher realizations and liftings, along with lower depreciation and operating expenses. Downstream earnings, excluding special items and foreign exchange, improved by about $540 million, reflecting higher earnings from CPChem, mainly due to the absence of fourth quarter of 2017 hurricane impacts, along with improved refining and marketing margins. The variance in the other segment largely reflects lower corporate charges and a favorable swing in corporate tax items between quarters.

Turning now to slide 8, first quarter production was 2.852 million barrels a day, an increase of 4.5% over an average 2017 production, and was in our guidance range for 2018. This production level represents an all-time quarterly high for the company. Growth is expected to continue during 2018, with Wheatstone Train 2 coming online. Major capital projects such as Wheatstone, Hebron, and Stampede ramping up, and continued growth in our shale and tight assets. During the quarter, the impact of asset sales on product was negligible. In the second quarter, we forecast a quarterly asset sale impact of around 15,000 barrels per day, mainly from our recent Elk Hills and Democratic Republic of the Congo transactions. We'll also start our planned turnaround activity in the second quarter.

Our full-year production guidance remains unchanged at 4-7% growth over 2017, excluding the impact of asset sales. On 5-9, first quarter 2018 production was an increase of 176,000 barrels a day, or 6.6% from first quarter 2017. Major capital projects increased production by 228,000 barrels a day, as we started and ramped up multiple projects including Gorgon and Wheatstone. Shale and tight production increased 101 barrels a day, mainly due to the growth and the midland and Delaware basins in the Permian. Base decline, net of production from new wells, such as those in the Gulf of Mexico and Nigeria, were 39,000 barrels a day. The impact of 2017 asset sales, mainly in the U.S. midcontinent, Gulf of Mexico, and South Natuna Sea, reduced production by 61,000 barrels a day. Entitlement effects reduce production by 50,000 barrels a day, as rising prices and lower spend reduce cost recovery barrel.

Turning to slide 10, Gorgon and Wheatstone delivered strong and reliable performance in the first quarter. First quarter net production was 202,000 barrels of oil equivalent per day from Gorgon, and 67,000 barrels of oil equivalent per day from Wheatstone. We shipped 69 LNG and 4 condensate cargos and were able to take advantage of rising oil-linked prices, as well as strong Asia LNG spot prices, which averaged over $10 per BOE for the quarter. We continue to fine-tune the plans to enhance reliability and boost capacity. These efforts are yielding favorable results. Morgon first quarter production is more than 5% higher than our previous best quarter. And Wheatstone Train 1 has been running well. We have a planned pit stop on Gorgon Train 2 next month to replicate performance improvement modifications that we have made in the other 2 trains. And work on Wheatstone Train 2 is progressing well and commissioning activities are ongoing. The warm end is expected to be ready for start-up shortly and we're expecting to begin LNG production this quarter. Dom gas is expected to start up late in the third quarter.

Turning to the Permian, Permian shale and tight production in the first quarter was up about 100,000 barrels a day, or 65% relative to the same quarter last year. Looking forward, we forecast Permian unconventional growth of 30-40% annually through 2020. All of this is premised on running 20 company-operated and approximately 9 net rigs on NOJV properties by year-end. In March, we guided to 2-3% annual growth from our base plus shale and tight business through 2022 at a $9-10 billion of annual capital spend. We are currently running 17 rigs and expect to stand up our 18th company-operated rig next month. We also continue creating value through land transactions. We executed 9 deals, swapping approximately 25,000 acres in the first quarter and we have several others under negotiation. As you know, these laterals enable high-value, longer laterals. We often get questions about our Permian takeaway capacity as well as other questions on the industry macro-environment. Mark has upped our midstream and strategy groups and will provide some additional insights. Over to you, Mark.

Mark Nelson -- Vice President, Midstream, Strategy and Policy

Thanks, Pat. As Pat mentioned, we get questions these days about Permian related differentials, the long-term oil market, and LNG supply and demand. So turning to slide 12, let's continue with the Permian story where we believe optimizing the value chain from wellhead to customer differentiates Chevron from many in the business. As you know, our advantage starts with our land position and our factory model and continues with the market knowledge of each barrel's value at any point in time and ends with the ability to appropriately place those barrels. For example, recent crude differentials in the midland basin have widened and we've secured flow and preserved margin by proactively procuring enough capacity to move product in multiple market centers, negotiating highly competitive transportation rates. Batching and blending to meet market demands and avoid price discounts and by accessing the best world markets for each barrel with our export capabilities. Simply said, our goal is to maximize the return on every Permian molecule.

Another question that is often asked is reflected on slide 13 and that is: What role does oil play in meeting the world's growing energy demand and the decades to come? In developing our point of view, as you would expect, we use detailed internal and external analysis to evaluate supply and demand scenarios and the associated opportunities and risks in our business. Our macro liquids view is similar to a number of independent assessment and we're showing one of these assessments, the IEA new policy scenario, in the upper right. We believe that oil demand will continue to grow for the foreseeable future and the need for incremental supply continues to exist in any realistic scenario. Reinforcing this view, today's liquids demand continues to be in the higher-end of most independent forecast. The chart in the bottom right illustrates another of our points of view. We believe in a longer, flatter supply curve. Despite the recent run up in prices, we believe capital discipline, cost management, and market signpost will always matter. And we are well positioned to win in any environment given our advantage portfolio.

Turning to page 12 in the macro LNG view, this graph reflects the latest LNG demand projections from Wood Mackenzie with their supply forecast. Highlighting that he LNG market is becoming oversupplied in the short term as new projects continue to ramp up in both the Pacific and Atlantic basins. North Asian LNG demand however, especially in China, was stronger last winter than the market anticipated. In fact, 2017 Chinese gas demand was up 15% year-on-year with LNG imports up 46%. While this growth rate may moderate, the demand drivers appear mostly sustainable with goal to gas switching in residential and industrial applications mandated by the Chinese government to reduce air pollution. So the LNG market should rebalance with a supply gap expected to pen before the middle of the next decade and this is where Gorgon and Wheatstone capacity creep and debottlenecking opportunities will fit very nicely. Only the most cost-competitive projects will be able to move forward in this space and we will be very disciplined with our investment and will fund only those projects that will generate top returns. With that, I'll turn it back over to you, Pat.

Pat Yarrington -- Vice President and Chief Financial Officer

All right, let me close this out here on 515. I'd like to reiterate some of our key messages from our recent security analysis meeting and to demonstrate how we're delivering on those commitments.

First, our gas generation improvement trend continues and is inline with previous guidance. In the first quarter 2018 cash flow from operations, excluding working capital, with $7.1 billion, well in excess of our cash capital expenditures and quarterly dividend commitment.

Second, we are executing a disciplined C&E program, allocating capital to the highest return projects that compete in our portfolio.

Third, we grew production by 4.5% from full-year 2017 to 2.85 million barrels a day, achieving an all-time quarterly high for the company and trending well within guidance.

Fourth, we have an advantage portfolio in the Permian basin that is delivering on all cylinders. Year-on-year, we added 100,000 barrels per day of shale and tight production here, trending ahead of recent guidance, and we were leveraging our midstream business to maximize returns on every molecule.

And lastly, but very importantly, we increased the dividend per share by 4%, delivering on our #1 financial priority to shareholders.

So that concludes our prepared remarks, and Mark and I are now ready to take questions. Please keep in mind that we have a full queue and try to limit yourself to one question and one follow-up if necessary, and we'll certainly do our best to try to get all of your questions answered. Jonathan, go ahead and open the lines please.

Questions and Answers:

Operator

Thank you. Ladies and gentleman, if you have a question at this time, please press * then 1 on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the # key. If you're listening on a speakerphone, we ask that you please lift your handset before asking your question to provide optimum sound quality. Again, if you have a question, please press * then 1 on your touchtone telephone.

Our first question comes from the line of Jason Gammel from Jefferies, your question please?

Jason Gammel -- Jefferies Group -- Analyst

Thanks and good morning everyone. Pat, really great quarter just in terms of demonstrating the cash generation potential that Chevron has moving forward. And so I guess we actually get to the high-quality question about what you would potentially do with discretionary cash flow. In the capital program, it's obviously very disciplined, it's with a fairly tight range, balance sheet's about where you want it to be. That kind of leads us to share buybacks and what would you potentially need to see to begin a repurchase program?

Pat Yarrington -- Vice President and Chief Financial Officer

Jason: thanks for the question and thanks for acknowledging the good quarter. I think at this particular point in time our messages around share repurchases really haven't changed from what we said from just a few short 6 weeks or so ago, and at that time we said we wanted to see the cash flow actually materialize, we said we wanted to see prices sustained a little bit. We do fundamentally believe that it is our fourth priority and dividend growth is #1, leading the business is #2, the balance sheet as you say is #3, and then surplus cash. Once we've satisfied all those other commitments turns into a share repurchase program. It is part of the value proposition that we have offered shareholders in the past. As you know, 10 out of the last 14 years we have had share repurchases and we only stopped them during the financial crisis, and then in the last 3 years when prices had their collapse. It's very much a part of our thinking these days and when we reinaugurate it, if the circumstances permit that, we want to be able to do so in a sustainable fashion.

Jason Gammel -- Jefferies Group -- Analyst

Appreciate those comments, Pat. Maybe just as my follow-up, one for Mark. Mark, you mentioned that the debottlenecking at Gorgon and Wheatstone would be toward the low end of the cost curve and the LNG supply stack. Do you see anything else in the portfolio that would potentially be competitive and I guess I might even be referring specifically to expansion trends in either one of those projects?

Mark Nelson -- Vice President, Midstream, Strategy and Policy

Great question, Jason. I think from an Asia LNG perspective the most exciting thing for us, of course, is the amount of demand that we're seeing in that part of the world and it's probably premature for us to be thinking about extra trains as we have considerable opportunity moving from both ramp up to debottlenecking and having spent much of my career around refineries I wouldn't underestimate the opportunity there and the size of the prize. So we're focused on ramp up, efficient operation, and then building our way into leveraging the existing infrastructure in Australia. So thanks for the question.

Jason Gammel -- Jefferies Group -- Analyst

Sounds like a systematic approach, thanks.

Operator

Thank you. Our next question comes from the line of Paul Cheng from Barclays, your question please?

Paul Cheng -- Barclays -- Analyst

Hey guys. Good morning. I have two questions; I think that for both of them for Mark. How much is the oil production from Permian that U.S. selling Permian in the first quarter and what is your takeaway capacity for the next couple years? Have you already [inaudible] sufficient according to your current growth plan? And also, we have heard some people talking about gas handling in the basin -- they started become an issue; want to see what is your view on that? So that's the first one. May as well ask the second one, yes on the LNG market. Want to see whether you guys have been actively marketing or trying to market additional gas and what's the conversation with the customer this [inaudible] and what's the biggest differences, if there's any?

Mark Nelson -- Vice President, Midstream, Strategy and Policy

Thanks, Paul. Thinking about -- and I'll address your Permian takeaway capacity question kind of at the high level as you can imagine. We're very comfortable with our off take positions today and it goes all the way back to that advantage portfolio and maybe equally importantly disciplined development. So allows us to keep up with our production and we do that by partnering with our strong infrastructure companies, and we get highly competitive rates, and then they execute on infrastructure projects that quite frankly might not compete in our portfolio and we view that as activating our value chain at the lowest possible capital investment which is kind of a return driven mentality. We will hit moments of tightness and length, but we like our position moving forward.

Paul Cheng -- Barclays -- Analyst

How about the gas handling?

Mark Nelson -- Vice President, Midstream, Strategy and Policy

Yeah, so from a gas perspective, all three streams -- so oil, gas, NGL's, all must flow in the Permian and as you know the oil tends to drive the economics but we have flow assurance across all three streams today, and again we're comfortable with our position looking forward.

Paul Cheng -- Barclays -- Analyst

But will the basin, as a whole will have a pardon -- if not, Chevron?

Mark Nelson -- Vice President, Midstream, Strategy and Policy

Yeah, from a basin perspective you certainly -- as we've all read the news, you can see some competitors who perhaps don't have either the same discipline or the same advantage portfolio experience experiencing problems. But in the Permian in general, most of those would be temporal. We see that as a region that will solve those types of problems and only have got kind of temporal challenges.

On your LNG marketing question, as you know, we've chosen to do business with some of the largest, most reliable customers in that part of the world and we have long-term contracts. The natural discussion is to go on about wanting reliability and the best sustainable price continues, as we would have expected. So we're seeing customers continuing to like the reliability that we've been able to deliver and our flexibility in helping them with some of their operating challenges. So from our perspective, we see those relationships remaining very strong. Thanks, Paul.

Paul Cheng -- Barclays -- Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of Neil Mehta from Goldman Sachs, your question please?

Neil Mehta -- Goldman Sachs -- Analyst

Hey, good morning guys and congrats on a good quarter. My first question is just related to cost inflation across the portfolio if you're seeing any early signs of cost increasing and any comments specifically international versus U.S.

Pat Yarrington -- Vice President and Chief Financial Officer

Okay, yeah, I think that by and large the more material cost pressures that we've seen have been limited to the Permian and the U.S. on conventional market. The rest of the world -- they're beginning to see some cost pressures but not of the same -- it's really as though the future rates have declined in the rest of the world probably have stopped and so you're probably leveling out there so you're beginning to see a little tension there. Whereas in the Permian, you are actually beginning to see cost increases. I'd like to take a moment though and acknowledge that we're largely protected in our Permian cost structure this year because of the contracting strategies that we have followed. And this is again, one of the benefits of having a 20 rig program that has been long planned and we're well disciplined around it that's allowed us to line out all of the services and contract arrangements that we have needed well in advance, and so we have about two-thirds of our spending this year that's either occurring at known prices or index costs or have cost containment capabilities built into them.

Neil Mehta -- Goldman Sachs -- Analyst

Thanks, Pat. The follow-up question is, how do you get comfortable of the management teams that the company is not underinvesting one of your peers is out taking a much more aggressive approach around capital spend over the next couple of years. And I guess one of the things that we hear when people push back on our view on the company is that the fear is that you're in harvest mode right now, but we're gonna go into early next decade, and what are the projects that will drive the next wedge of ultimately cash flow growth that enables you to replenish the portfolio and off-set the declines? So I wanted you to respond to that narrative because it's out there in the market.

Pat Yarrington -- Vice President and Chief Financial Officer

I think the primary thing that I would say is we're not after volume growth for volume growth's sake. We're after growing value and we have a tremendous portfolio here. We showed a slide back in march that had 40 years of 2P resource development opportunity and is very resource that can be developed at relatively modest capital investment programs. We feel very comfortable about the portfolio that we have and individually we've got line of sight in the unconventional growth between now and into 2022 and then in 2022 we see PCO's, the PCOW, PNP, FJP project first production coming online. So for the next several years, we've got line of sight on very good growth and frankly, a portfolio that allows growth beyond that.

Operator

Thank you. Our next question comes from the line of Doug Leggate from Bank of America, your question please?

Doug Leggate -- Bank of America -- Analyst

Thank you. Good morning, everybody. I'll take my two as well if I may part. I'm afraid I'm going to open up with buyback question again just go back to that very quickly. Just philosophically, I'm guessing buybacks are not something you'd want to chop around quarter to quarter. So I guess my question is: What level of -- what would management need to see to become comfortable to commit to buyback program assuming you would need that to be ratable? And I'm thinking about level of cash in the balance sheet. For the quarter to quarter, what we're seeing is a function of cash tax payments and interest charges and so on. At what point would you be comfortable to say OK now we're ready to get going with this?

Pat Yarrington -- Vice President and Chief Financial Officer

Yeah, I mean it's hard to -- I don't want to put a quantification on this at this point because I don't want to kind of get ahead of the internal thinking on this but clearly we would have to have sustainability and a view of surplus cash generation. Beyond the $18-20 billion capital program that we want to fund, beyond the growth rate that we anticipate around dividends, and as you say, our balance sheet is hovering at a very reasonable place at the moment. So we'd have to have a view of sustainability. And when I say sustainability, I don't just mean this quarter to next quarter, maybe the third quarter out, but I really mean over a series of years. So we would like to be able to kind of dollar average in the cost of that share repurchase program because we do have some shareholders who are not in favor of share repurchases because of the concept that you only do them when you have the cash available, and when you have the cash available your stock price is high. So the way that we can mitigate that is by having a very sustainable share repurchase program so it really comes down to the longer term -- or I'll say medium term -- cash generation capability of the firm and expectations around that.

Doug Leggate -- Bank of America -- Analyst

I appreciate that so that makes a lot of sense. I'm guessing the dividends -- that takes a priority, as you've said previously.

Pat Yarrington -- Vice President and Chief Financial Officer

Absolutely.

Doug Leggate -- Bank of America -- Analyst

So my follow up is a quick one. Obviously you had a tremendous quarter relative to what the street was expecting, and when we look through the presentation there's a couple of comments in there about liftings and other both U.S. and international. Could you just talk a little bit about what that was because was there some favorable timing issues in terms of sales versus production? And I'll leave it there. Thanks.

Pat Yarrington -- Vice President and Chief Financial Officer

Yeah, I mean actually for the first quarter, we were slightly under lifted so I think it's just a variance between the position of this quarter versus the prior quarter -- very modest there. I think part of the earning improvement or the earnings beat that you might be highlighting really relates to depreciation and in particular if you were to call back we had 155% reserve replacement ratio in 2017 and that obviously allows you to as you go forward to lower your DDNA rate per barrel.

Doug Leggate -- Bank of America -- Analyst

Makes a lot of sense. Thanks, everybody.

Operator

Thank you. Our next question comes from the line of Phil Gresh from J.P. Morgan, your question please?

Phil Gresh -- J.P. Morgan -- Analyst

Thanks and good morning. First question's a bit of a follow up to Neil's just around growth outlook through 2025. You do have some capital spending that will be rolling off after this year, Wheatstone and some other things. How do you think about where that wedge is -- assuming you're gonna keep a cap ex cap in place through 2020 as promised, how do you think about where that extra cash flow might go between say adding more rigs in the Permian versus something like Gulf of Mexico where a peer of yours to sanction a project with a $35 break even proposition?

Pat Yarrington -- Vice President and Chief Financial Officer

I think that we really feel good about sticking to the 20-rig program in the Permian. We think there is still opportunity to lower development costs, lower operating costs there, and maximize revenue streams out of that -- so that will be a primary area of focus for us getting really good efficiency out of that particular asset. If I think about other areas where there could be small incremental money spent, it would really be around the appraisal and pre-fee, pre-engineering work perhaps in the Gulf of Mexico. We have four potential areas of interest there -- or areas of potential interest I guess I should say -- Anchor, Tigris, Ballymore and Whale, so that would be areas where we would look to do further evaluation. I should also mention that the development activity around other shales other than Permian -- so in the Marcellus, in Kaybob Duvernay, in Vaca Muerta, those areas could likely pick up additional capital investment.

Phil Gresh -- J.P. Morgan -- Analyst

Got it, OK.

Pat Yarrington -- Vice President and Chief Financial Officer

Can I just go back and mention one thing with regard to deep waters so people don't misinterpret what I'm saying here. We do have multiple opportunities that we can evaluate but we would be very disciplined and very ratable be working on the pacing of any sort of development that we would do there.

Phil Gresh -- J.P. Morgan -- Analyst

Right, so the commitment to the $20 billion cap. Just one question on the quarter: One of your peers on cash flows reported a flip in their deferred tax from the headwind to the tailwind at these higher price levels. You mentioned that billion dollar headwind in the quarter from affiliates earnings versus distribution which is about half of the headwind you're expecting for the entire year. Just curious if deferred tax played out as you expected?

Pat Yarrington -- Vice President and Chief Financial Officer

I would say directionally, deferred tax played out as we were expecting. We did have -- it is influenced as you might expect by the timing of when you placed assets in service and when you get bonus depreciation. In regard to the overall set of headwinds, I had given guidance back in March of $2.5-3.5 billion as the headwinds for the year. But I had said at the time that we thought working capital would be nil. I would say if prices hold where they are today there will be a little bit of a penalty in working capital as I mentioned in my prepared remarks so you may want to think toward the -- certainly activity toward the higher end of that range that I gave you. I will say this is very hard for us to predict though and so I do want to reserve the right every quarter to come back and give you an update.

Phil Gresh -- J.P. Morgan -- Analyst

Thanks.

Operator

Thank you. Our next question comes from the line of Guy Baber from Simmons & Co., your question please?

Guy Baber -- Simmons & Co. -- Analyst

Thanks for taking the question. Pat, I wanted to stick on the cash flow here a little bit but the $7.1 billion in pre-working capital cash flow seemed to be better than the framework you all gave at the analyst day when we adjust for commodity price and understand that 1 Q is typically weaker given downstream seasonality and the affiliate dividend timing. So I just wanted to confirm that outperformance versus the internal plan and was wondering if you could isolate some of the key drivers of that better than expected cash flow? What sticks out to you all internally? And then with grant at these higher levels here, just as a check, there's a general sensitivities you all have given still hold, or do we need to rethink those a little bit?

Pat Yarrington -- Vice President and Chief Financial Officer

Yeah so Guy, I'd say that the first quarter was really a very clean quarter and it's a good basis I'd say for you to build into your models going forward. I think we are running a little bit ahead perhaps on the guidance that we gave. I think first quarter's a good benchmark for you there. And the sensitivity that we had given for dollar of improvement for grant on earnings on cash flow is about 450, -- excuse me, on earnings -- it's a little less than that.

Guy Baber -- Simmons & Co. -- Analyst

That's helpful, thanks. And then I had a follow-up for Mark. Appreciate had a view on the macro oil landscape here. Could you just talk a little bit maybe about what your base case expectations are from a high level when you think about this decline in long cycle capital investment that's taken place for the industry over the last few years. So from 2013 to 2018 we tallied up about 2 million barrels a day of major project capacity that started up per year on average, and then that drops to around only 1 million barrels a day from 2019 to 2022 or so. Is the Chevron view -- I mean, do you see something similar? Do you see a supply gap emerging for the industry on the oil side over the next few years? And when might you see that beginning to show up in supply demand balances?

Mark Nelson -- Vice President, Midstream, Strategy and Policy

Thanks, Guy. So first, from a short-term perspective obviously we've hit a space where the market's rebalanced and that's on the back of some fairly solid demand -- in fact, demand that has surprised most folks to the upside and effective curtailment or planned or unplanned declines in certain countries around the world on top of geo-politics. So that's all short-term price support for today. We're not designing our business on these kinds of prices. We're driving our business for a lower, for a longer assumption, and I think we're coming from a time where we're practiced at production coming from large investments versus short-cycle activity. As an industry, we do not forecast that as well as we do the large projects so we have a perpetual supply gap, I mean that's the industry that we're in. but I would expect prices to stay in a fairly tight range over time and we're gonna design our business to deal with the lower end of those assumptions.

Guy Baber -- Simmons & Co. -- Analyst

Thanks, Mark.

Operator

Thank you. Our next question comes from the line of Blake Fernandez from Howard Weil, your question please?

Blake Fernandez -- Howard Weil -- Analyst

Folks, good morning, and Frank I presume this is your last call so thanks for all the help and good luck to you. Pat, I wanted to go back to you, you had mentioned the equity affiliate headwinds and you kind of addressed that. I guess what I was thinking specifically is on PCO. Is there an oil price level that you would actually begin to start getting distributions from that?

Pat Yarrington -- Vice President and Chief Financial Officer

Actually, Blake, we do still get distributions. It really is a determination that's made by the partnership council. It is not solely within Chevron's control. But the partnership council folks take a look at what are the requirements for funding the projects that's under development. They take a look at what cash generation has been, they take a look at what the partner's dividend interests are and will negotiate basically to a dividend declaration and they can do that -- they review that multiple times during the course of the year and they can do one dividend a year, they can do a couple dividends a year, it's really the partnership council.

Blake Fernandez -- Howard Weil -- Analyst

Okay, so it sounds like there is some flexibility and potentially could increase depending on what oil prices do.

Pat Yarrington -- Vice President and Chief Financial Officer

There is. We had a dividend last year; expectations are for our dividend this year as well. So it's again not anything that we control uniquely within Chevron.

Blake Fernandez -- Howard Weil -- Analyst

Okay. The second question I'll just take advantage of Mark being on the call but the 25,000 acres in the Permian that were transacted, it sounds like it was a swap, so I just wanted to confirm that your acreage position hasn't really changed overall. I guess I was under the impression that a lot of those transactions had already come to fruition and y'all were kind of done so are you still in the process of kind of marketing and coring up?

Mark Nelson -- Vice President, Midstream, Strategy and Policy

Thank you, Mark. So you're right, mostly swaps were discussed in the materials that you saw. And never done would be my answer in regard to potentially looking for ways to get longer laterals in the marketplace. From our perspective, we won't stop looking and we believe it's created considerable value for that kind of disciplined execution that we talked about. And in fact, I would expect more transactions in the future in this space.

Pat Yarrington -- Vice President and Chief Financial Officer

And I would just add, you know, swaps are often kind of hard to put together just because you're trying to -- both parties optimize. So they may take a little bit longer duration to come to fruition.

Operator

Thank you. Our next question comes from the line of Ryan Todd from Deutsche Bank, your question please?

Ryan Todd -- Deutsche Bank -- Analyst

Great, thanks, maybe a first quick one on the Permian. Congrats on a great quarter, I think you guys may have blown out the middle and differential all by yourself there. Can you talk a little bit about -- obviously there's some timing issues here but what drove -- some of the drivers of the particularly strong quarter on quarter performance in Permian, whether it was from particular areas, number of completions, and how to think about the trajectory of that going forward?

Pat Yarrington -- Vice President and Chief Financial Officer

Sure, Ryan. Basically, we had a large increase in the quarter because we put several wells on production at the very tail end of 2017. We also saw increased NOJV activity. And the last point that I would make is that there can be lumpy -- the production increases that we show can be lumpy. It wouldn't necessarily have you think that the increase from fourth to first quarter is something that would be repeatable or ratable necessarily.

Ryan Todd -- Deutsche Bank -- Analyst

Thanks. And then maybe -- we didn't talk about IMO 2020. Can you maybe talk a little bit about how you think about your relative positioning into it and whether you would envision -- or how you think about the attractiveness of any potential investments to take advantage of the situation?

Pat Yarrington -- Vice President and Chief Financial Officer

Yeah, I think the short answer is really that Chevron's position is pretty well placed, we're well positioned, we have complex refineries and we produce more distillates than fuel oil, we don't really produce much fuel oil in the U.S. We do have some exposure there around Asia. But the kind of the situation that we've got from a refining capacity standpoint as well as the fact that we've got midstream and trading capacity that we can optimize over the course of what we think will be an unstable market here as this rationalizes out, puts us in what we think in a pretty good position. It's a little hard to understand exactly what the impacts are so we continue to monitor what the industry response is going to be and what the actions are gonna be taken by the various parties there. It's kind of an unusual regulation in the sense that there's no single actor that's tagged with compliance. So there's multiple ways that compliance can occur. It can occur on the part of the shippers or it can occur on the part of the refiners. So it's a little hard to understand exactly how compliance will take place.

Ryan Todd -- Deutsche Bank -- Analyst

But at this point you guys would envision deploying any meaningful capital to kind of driven the projects?

Pat Yarrington -- Vice President and Chief Financial Officer

No, we would not.

Operator

Thank you. Our next question comes from the line of Roger Read from Wells Fargo, your question please?

Roger Read -- Wells Fargo -- Analyst

Good morning and congrats on the quarter and Frank, enjoy the operational side of lies. Hey jumping in, since I've got you, Mark and Pat on here. As we think about your ability to capture whatever differential exists between the gulf coast and the Permian, how should we think about that as flowing through your business? And the reason I'm asking, Pat, is thinking about is a realization and so we'll see it in the upstream part there or does it flow through somewhere else? Just trying to maybe head off with the past concerns at incoming quarters realizations could leak but the overall number's fine. So how does it flow through on your upstream business?

Pat Yarrington -- Vice President and Chief Financial Officer

It would come through the upstream. Upstream realization.

Roger Read -- Wells Fargo -- Analyst

Okay, so whether it's commercial, pipeline, or whatever other capture, it'll all stay in the upstream side?

Pat Yarrington -- Vice President and Chief Financial Officer

That's correct.

Roger Read -- Wells Fargo -- Analyst

Okay. And then switching gears just since you've put the chart up there with the longer, flatter, supply curve; you've talked a little bit earlier about some of the Gulf of Mexico deep-water opportunities. Pricewise, it looks like deep-water, not OPAC, would be in the money here. So how do you think about when you're comfortable moving forward with an FID as you complete your studies on those various projects?

Mark Nelson -- Vice President, Midstream, Strategy and Policy

Pat, I'll start. So it's about priorities from our perspective in capital allocations so the good news of having a portfolio that's so strong with the unconventionals with short cycle high return investments it makes all of the other projects -- you have to compete to be brought forward and I've heard J Johnson say numerous times the idea of changing outcomes and improving returns. When you target a group of engineers on making a project have higher economics, it's amazing what can be developed for us to consider. Pat, would you add to that?

Pat Yarrington -- Vice President and Chief Financial Officer

So I'd just say our first opportunity we've got obviously is infield drilling and keeping existing facilities fully loaded here. To the extent that there's a deep-water -- a new reservoir found that can tie into existing facilities obviously that's -- the economics there would be stronger. But we're working to get the development cost of Greenfield down significantly -- so standardizing on surface facilities, design one, build many. Standardizing along with the industry on subsea kit. We're also in a mode here now where we would be designing the production facilities -- perhaps not for peak production, but for the best capital efficiency, so longer subsea laterals. There's an awful lot that we think we can do in the deep-water area to continue to get development costs down. But we have to see that actually materialize before we would be in a position to take an FID. We have a number of opportunities that are being evaluated I'd say at this particular point in time and I can't really say which one is going to rise to the top first. But it's nice to have activity under way there, and we're making good progress.

Roger Read -- Wells Fargo -- Analyst

Great, thank you.

Operator

Thank you. Our next question comes from the line of Theepan Jothilingam from Exane BNP Paribas, your question please?

Theepan Jothilingam -- Exane BNP Paribas -- Analyst

Just one question actually, coming back to the LNG performance. Could you talk about just in terms of product back to Wheatstone and Gorgon? How sustainable is it to produce above that nameplate capacity? And just a follow up question to that would be: Could you remind us in terms of the volumes from those two projects? Is all of it on long-term contract? So have there been some opportunities to, let's say, optimize some of that volume through price and overcharge?

Pat Yarrington -- Vice President and Chief Financial Officer

Yeah, I would say we have been spending time and effort and taking these pit stops in order to improve the reliability, for example at Gorgon. We do think there's opportunity over time to expand capacity through debottlenecks and gain more capacity and gain more efficiency. We're willing to make investments now to get to a certain reliability and efficiency today. Longer term I think there's debottlenecking activity that will be available to us. And in terms of the contracts on Gorgon and Wheatstone, we are about 90% committed under long-term contracts for those.

Theepan Jothilingam -- Exane BNP Paribas -- Analyst

Was it a particularly good quarter in terms for that remaining 10% or was there overcharge or trading profit?

Pat Yarrington -- Vice President and Chief Financial Officer

It was a good quarter in terms of the spot cargos, Asian spot prices, on average, were above $10, and so it was a very good quarter from a spot standpoint.

Mark Nelson -- Vice President, Midstream, Strategy and Policy

But remember that's only 10% of our production.

Theepan Jothilingam -- Exane BNP Paribas -- Analyst

That's helpful; thank you all and best of luck, Frank.

Operator

Thank you. Our next question comes from the line of Sam Margolin from Cowen & Co., your question please?

Sam Margolin -- Cowen & Co. -- Analyst

Hey, good morning. Frank, I know you like to keep the call tight but I would be remiss if I didn't say thanks and congrats as well. My first question is just sort of a mechanics question around the affiliates. I recall in the past some conversations that there would be a co-lending program that would sort of functionally exclude affiliate spending from what we might think about as operating cash flow. Is that still a factor or has the Chevron level found kind of more efficient uses of capital than that?

Pat Yarrington -- Vice President and Chief Financial Officer

So the co-lending is really specific to the Tengiz project and we had co-lending previously. Right now, through 2018, we've had no requirement for any sort of co-lending. With prices where they are today and if they stay at this sort of level it's not clear whether there will be a co-lending requirement in 2018. It's something you should always have in the back of your mind but with prices at this sort of level maybe that is something that won't materialize for 2018. The point of the co-lending -- obviously, this project was inaugurated back in a lower price environment, and the point of the co-lending was to be able to assure and allow the fact that all partners being able to fund their share of the project. So it really has been dependent upon what prices have been and the ramp up of spend on the project per se. 2018 and 2019 will be the peak years of spending for TCO's and investment project, but 2018 so far has certainly been into a strong price environment.

Sam Margolin -- Cowen & Co. -- Analyst

I see, OK, thanks for the clarification. And then my follow up's just -- I guess it's for both Mark and Pat. You know, the comments about thinking critically on Permian takeaway I think resonate with the market because it's come up among a lot of the independents. And given your sort of view on LNG markets globally, how do you see U.S. LNG maybe playing a role particularly with respect to kind of the areas in the Permian more in the west Texas part of the Delaware basin that are a little gassier, if not as an operator maybe as a partner or a customer of that solution?

Mark Nelson -- Vice President, Midstream, Strategy and Policy

From a macro perspective obviously you'll see companies start to give in some of the length that will occur in the region. You'll start to see people consider further investments in the gulf. And the gulf coast has the compete with landed prices in Asia, and from our perspective we've got such an advantage position taking care of that Asian growth from our base assets in Gorgon, in Wheatstone, that we'll watch what others do. We certainly have other LNG options around the world but all of it has to compete with landed price in Asia.

Sam Margolin -- Cowen & Co. -- Analyst

Thanks very much.

Operator

Thank you. Our last question comes from the line of Rob West from Redburn, your question please?

Rob West -- Redburn -- Analyst

Hello, thank you for taking my question. About to go back to something you said earlier, Pat, which was about the third in production -- I mean over the quarter. You attribute it to more well completions. The follow up that put in my mind was; can you say whether over the quarter you drew down your infantry of ducks or whether they were still building, just in terms of trying to assess the sustainability of that growth rate? That's the first one and I've got a follow up. Thanks.

Pat Yarrington -- Vice President and Chief Financial Officer

I think there was a modest reduction in ducks during the quarter but you have to think about it as being modest.

Rob West -- Redburn -- Analyst

Okay, thank you. The second one is about Indonesia where I know you've got an early stage gas project in the pike. And one of your earlier peers sanctioned a gas project this week I think so topical. I was wondering -- so I think that particular project you have but the hold up is really on license extensions. Is that right? If so, what's the timing on resolving that? If it's not right, could you say anything about the other bottlenecks you still need to overcome there?

Pat Yarrington -- Vice President and Chief Financial Officer

Yeah, it's a good question. We do -- it's called a Gendalo-Gehem project and we do have a new development concept or we're reworking I guess the development concept is the best way to say it. Trying to decapitalize work ahs been under way on that effort for the last several months, in fact, probably more than a year at this particular point in time. So work is progressing on that but I would also say that the contract extension is also an element here and we've delivered an expression of interest to the government of Indonesia with regard to extensions of the concessions. So we want to make sure that it's a long wide project and we want to make sure that the combination of the development concept, as well as the fiscal terms, gives us a high return project.

Rob West -- Redburn -- Analyst

Thank you for those details.

Pat Yarrington -- Vice President and Chief Financial Officer

Okay, I think that closes us off here. I'd like to thank everybody on the call today. We certainly appreciate your interest in Chevron and everyone's participation. Jonathan, back to you.

Operator

Ladies and gentlemen, this concludes Chevron's first quarter 2018 earnings conference call. You may now disconnect.

Duration: 55 minutes

Call participants:

Pat Yarrington -- Vice President and Chief Financial Officer

Mark Nelson -- Vice President, Midstream, Strategy and Policy

Jason Gammel -- Jefferies Group -- Analyst

Paul Cheng -- Barclays -- Analyst

Neil Mehta -- Goldman Sachs -- Analyst

Doug Leggate -- Bank of America -- Analyst

Phil Gresh -- J.P. Morgan -- Analyst

Guy Baber -- Simmons & Co. -- Analyst

Blake Fernandez -- Howard Weil -- Analyst

Ryan Todd -- Deutsche Bank -- Analyst

Roger Read -- Wells Fargo -- Analyst

Theepan Jothilingam -- Exane BNP Paribas -- Analyst

Sam Margolin -- Cowen & Co. -- Analyst

Rob West -- Redburn -- Analyst

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