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Chevron Corporation  (NYSE:CVX)
Q4 2018 Earnings Conference Call
Feb. 01, 2019, 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 Fourth Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session and instructions will be given at that time.

(Operator Instructions). As a reminder, this conference call is being recorded. I will now turn the conference call over to the Chairman and Chief Executive Officer of Chevron Corporation, Mr. Mike Wirth. Please go ahead.

Michael Wirth -- Chairman and Chief Executive Officer

Thank you, Jonathan. Welcome to Chevron's fourth quarter earnings conference call and webcast. On the call with me today are Pat Yarrington, Vice President and Chief Financial Officer and Wayne Borduin, General Manager of Investor Relations. We'll 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. Please review the cautionary statement on slide two.

Back in March, I laid out Chevron's strategy to win in any environment. I outlined our three compelling strengths; an advantaged portfolio, sustainability at lower prices, and a strong balance sheet. I also indicated that the combination of these distinct advantages together with the commitments to action highlighted in blue would deliver growing free cash flow and shareholder returns.

In 2018, we delivered. We grew oil and gas production by more than 7%, achieving our highest ever annual production. We grew cash margins in our operated upstream assets contributing to an improvement in cash returns.

We lowered our unit costs and we sold $2 billion of assets. These outcomes yielded record free cash flow, a dividend increase and the initiation of a share repurchase program. 2018 was a very successful year and we intend to build on this momentum in 2019.

Turning to slide 4, a view of our sources and uses of cash. Excluding working capital, we generated over $31 billion in cash flow from operations and we achieved record free cash flow of nearly $17 billion; the highest level ever achieved by Chevron in any price environment.

This allowed us to deliver on all four of our financial priorities. For the 31st consecutive year, we maintained our commitment to dividend growth and paid out $8.5 billion in cash dividends to our shareholders.

Earlier this week, we announced a $0.07 per share increase in our quarterly dividend to a $1.19 per share representing a 6% increase. Second, we allocated capital across a diverse portfolio and funded our highest return projects. We have confidence these investments position us for sustainable growth and free cash flow. Third, we strengthened our balance sheet and paid down debt by $4.5 billion.

Finally, we began repurchasing shares in the third quarter and increased the rate in the fourth quarter, demonstrating further confidence in our future cash generation.

And with that, I'll turn the call over to Pat who will take you through the financial results. Pat?

Patricia E. Yarrington -- Vice President and Chief Financial Officer

Hey, thanks, Mike. Turning to slide 5, an overview of our financial performance. Fourth quarter earnings were $3.7 billion or $1.95 per diluted share. 2018 full year earnings were $14.8 billion or $7.74 per diluted share, up more than 60% from 2017. In the quarter, foreign exchange gains of $268 million were offset by a special item related to a project write-off.

A detailed reconciliation of special items and foreign exchange is included in the appendix to this presentation. For the full year, earnings excluding special items and foreign exchange totaled $15.5 billion. Return on capital employed for 2018 was 8.2%, up from 5% in 2017. Our debt ratio at year end was 18% and our net debt ratio was approximately 14%.

During the fourth quarter, we paid $2.1 billion in dividends, bringing the full year total to $8.5 billion. And we increased the rate of our share repurchases from $750 million in the third quarter to a $1 billion in the fourth quarter.

Turning to slide 6, for the full year, cash flow from operations totaled $30.6 billion, about 50% higher than 2017. Headwinds as we've defined them in the past, totaled $3.2 billion for the year in line with my original guidance. For the quarter, cash flow from operations was $9.2 billion, it was lower than in the third quarter, primarily because of lower commodity prices, but it was well above first quarter when prices were comparable.

This improvement within the year was due to the growth in production. Cash capital expenditures for the quarter were $4 billion and $13.8 billion for the year. The resulting free cash flow of almost $17 billion reduced our dividend break even price.

We are covering our cash CapEx and dividend at just under $53 Brent without consideration of asset sale proceeds. Before moving off cash flow, a little guidance for 2019. If prices hold at current levels, we expect headwinds for 2019 to be between $2 billion and $3 billion.

Now on to slide 7, full year 2018 earnings of $14.8 billion were approximately $5.6 billion higher than 2017. Special items, primarily the absence of a US tax reform gain of $2 billion lower gains on asset sales, and an increase in charges relating to project write-off resulted in a net $3.9 billion decrease in earnings.

A swing in foreign exchange impacts benefited earnings between the periods by $1.1 billion. Upstream earnings, excluding special items and foreign exchange increased by about $9.3 billion between periods primarily because of higher realizations and increased liftings.

Slightly offsetting were higher operating expenses largely associated with continued ramp up introduction along with additional taxes and other costs. Downstream results excluding special items and foreign exchange decreased by just over $90 million. Lower volumes reflected the sales of our Canadian and South African refining and marketing assets while higher operating expenses were associated with planned turnaround activity in the US. These items were mostly offset by favorable timing effects and improved results at CPChem.

In the other segment, excluding special items and foreign exchange, net charges for the period increased by almost 750 million due primarily to higher interest expense, and lower tax deductibility for corporate charges. Full year net charges were $2.3 billion in line with our guidance.

Our 2019 guidance for the other segment remains (ph) about $2.4 billion in net charges. As a reminder though, quarterly results in this segment are non-ratable.

Now on slide 8, 2018 production was 2.93 million barrels a day, an increase of 202,000 barrels a day or more than 7% from 2017. This is the highest level of production in the Company's history. Excluding the impact of 2018 asset sales, production grew approximately 8%, or 1% above the top of the guidance range we provided last January.

Major capital projects increased production by 227,000 barrels a day, as we continue to ramp up production at multiple projects most significantly Wheatstone and Gorgon. Shale and tight production increased 132,000 barrels a day, primarily in the Permian while production grew by more than 70% from 2017. Base declines, net of production from new wells mostly in the US Gulf of Mexico and Nigeria were 19,000 barrels a day.

The impact of asset sales in particular from the US Mid Continent, Gulf of Mexico shelf and the Elk Hills field in California reduced production by 50,000 barrels per day. Entitlement effects in total reduced production by 46,000 barrels per day, 17,000 of which was due to the effect of higher prices during the year.

Higher planned turnaround effects primarily at Angola LNG and Tengiz reduced production between years by 26,000 barrels per day. I'll now hand it back to Mike.

Michael Wirth -- Chairman and Chief Executive Officer

Thanks Pat. Turning to slide 9, reserve replacement continues to be a real success story. In 2018, our reserve replacement ratio was 136%. We added almost 400 million more barrels than we produced and divested. This outcome is especially significant because it was achieved while growing production more than 7%.

Our reserves to production ratio stands at a healthy 11.3 years showing the strength and sustainability of our portfolio. Our five-year reserve replacement ratio of 117%, further illustrates that strength through the price downturn.

Moving to slide 10, we continue to maintain our commitment to capital discipline. Total C&E in 2018 was $20.1 billion. This included approximately $600 million of inorganic spend for which we don't budget, primarily related to bonus payments for offshore leases in Brazil and the Gulf of Mexico. The stacked bar depicts our organic C&E budget for 2019 of $20 billion.

Within this budget, the cash component is $13.7 billion, while the remaining $6.3 billion is expenditures by affiliates, primarily TCO and CPChem.

In the 2019 budget, a $3.6 billion was allocated to the Permian and another $1.6 billion is allocated to other shale and tight assets. We expect approximately 70% of our total 2019 spend to deliver cash within two years. Our current spend profile has significantly lower execution risk relative to the past, but we had several large scale major capital projects under way concurrently.

Turning to slide 11, I'd like to provide an update on our portfolio optimization efforts. During 2018, we received before-tax asset sale proceeds of $2 billion with the largest contributors being the divestment of our Southern African refining and marketing business and our interest in the Elk Hills field in California. We recently completed the sale of our interest in the Rosebank project, West of Shetland in the UK.

In addition, we expect to close the sale of our interest in the Danish Underground consortium in the first half of 2019. And earlier this week, we executed an agreement to sell our interest in the Frade Field in Brazil. We continue marketing our UK Central North Sea and Azerbaijan assets. As with all divestments, we are focused on generating good value from any transaction. The progress we made last year is consistent with our guidance of $5 billion to $10 billion in asset sale proceeds from 2018 to 2020.

Turning to the Permian, production in the fourth quarter was 377,000 barrels per day, up 172,000 barrels per day or 84% relative to the same quarter last year. Annual production was up more than 70%. In the Permian, we remain focused on returns. We're not chasing our production target, nor are we altering our plans based on the price of the day.

Over the last two years, we transacted more than 150,000 acres through swaps, joint ventures, farm-outs and sales, further optimizing our large land position. In 2018, we had takeaway capacity for oil and liquids that was more than sufficient, and we've already added more capacity this year. We are pleased with our position and leading performance in the Permian, in just two years we've doubled our rig count, increased our resource base, decreased unit development and operating costs and more than doubled our production. We'll provide new guidance for our Permian portfolio in March.

Moving to LNG, the plants at Gorgon and Wheatstone performed well during the fourth quarter and averaged almost 400,000 barrels of oil equivalent per day. This was despite higher summer temperatures in December. Higher temperatures, as you know, generally reduce LNG throughput. We loaded 329 LNG cargoes from Gorgon and Wheatstone last year.

We've now commissioned the Wheatstone domestic gas plant and expect to provide gas to the local market in the next few weeks. We'll begin our routine cycle of planned turnarounds at Gorgon this year. We'll be on a four-year cycle, with one train undergoing maintenance each of the first three years and the fourth year having no turnarounds scheduled.

We expect turnarounds at the Gorgon trains to last about 40 days. These turnarounds offer the opportunity to perform routine maintenance and also to make small enhancements that increased reliability and throughput. We anticipate significant cash generation from these assets for many years to come.

Slide 14 shows our production outlook for this year, assuming a $60 Brent price. We expect production to be 4% to 7% higher than last year, excluding the impact of any 2019 asset sales. Our growth is largely driven by shale and tight assets and full-year production from Train Two at Wheatstone. These forecasts always need to acknowledge the uncertainties in our business as noted on the slide. In summary, we anticipate a third consecutive year of strong production growth.

Moving to slide 15, as announced earlier this week, we've signed an agreement with Petrobras America Inc to purchase its 110,000 barrel per day refinery and related assets in Pasadena, Texas. This addition to our Gulf Coast refining system allows us to process more domestic light crude, supply a portion of our retail market in Texas and Louisiana with Chevron produced products and realize regional synergies through coordination with our refinery in Pascagoula.

We expect to close by mid-year, and we'll provide further updates at our Analyst Meeting in March. Now just a few comments about future expectations. We expect positive production trends to continue in the first quarter and throughout 2019, reflected in the 4% to 7% growth forecast. And as early as first quarter, we expect additional co-lending to TCO in support of the future growth project.

In downstream, we expect low refinery turnaround activity in the first quarter which as you'll recall from our previous disclosure equates to an estimated after-tax earnings impact of less than $100 million.

Earlier in the call Pat provided you guidance on cash flow headwinds and corporate charges for 2019, and as we communicated earlier this week, there will be a $0.07 per share of quarterly dividend increase and we anticipate $1 billion in share repurchases during the quarter.

Moving to slide 17, I'd like to share a few closing thoughts. As I mentioned before, we intend to win in any environment. As a result of our advantaged portfolio, capital discipline, lower execution risk, strong balance sheet and record level free cash flow we are well positioned to continue to deliver strong shareholder returns.

That concludes our prepared remarks. And we're now ready to take your questions. Keep in mind, we do have a full queue, so please try to limit yourself to one question and one follow-up if necessary, and we'll do our best to get all of your questions answered. Jonathan, please open the lines.

Questions and Answers:

Phil Gresh -- JPMorgan -- Analyst

Thank you. (Operator Instructions). Our first question comes from the line of Phil Gresh from JPMorgan. Your question, please.

Yes. Hey, good morning, Mike and Pat.

Michael Wirth -- Chairman and Chief Executive Officer

Good morning, Phil.

Phil Gresh -- JPMorgan -- Analyst

First question, you talked about the dividend break even of $53 in 2018, you stepped up the dividend here at a higher rate than last year and they're also stepping up the buyback. So I guess, maybe if you could just elaborate a little bit on this, on the breakeven where you see that going? Is it moving lower and giving you more confidence in the -- more return the capital or just how you think about that calculus?

Michael Wirth -- Chairman and Chief Executive Officer

Well, Phil, you know, we worked really hard over the last few years to get that breakeven down. We were in the '80s, not that long ago and have made significant progress in bringing the dividend breakeven down. We've provided, I think a kind of a simple way to think about it in some of our prior definitions, and as we look forward in 2019, we think the dividend breakeven remains in the area where it was last year.

You see we've got really strong cash flows coming in right now and the commitment to a competitive increase in the dividend, the confidence to step up the rate of share, repurchases is evidence of our confidence that we've got those cash flows coming in an price environment, in a reasonable price environment, as Pat has said that we'll be able to sustain those kinds of payouts.

The other thing I'll just point out is our capital spending is still the same, and we've got the ability to provide strong production growth, sustain the kind of cash margins that you've seen out of our portfolio and do that at really modest capital spending relative to our history.

Phil Gresh -- JPMorgan -- Analyst

Sure. Okay, thank you. The second question, I guess will just be on the capital spending budget specifically for 2019, the Permian piece, pretty flattish year-over-year, which I think you highlighted last quarter. The non-Permian shale piece is stepping up quite a bit here, and I just want to know if you could maybe elaborate on that a little bit, not to steal any thunder from the Analyst Day, but is that something that is going to be contributing to this 2019 production growth guidance or is that something that you're ramping in '19 or would be more of a future contribution?

Michael Wirth -- Chairman and Chief Executive Officer

Well, we are beginning to ramp in the other basins, so we've added rigs actually in all the other shale and tight basins in which we operate. We've seen significant reductions in development costs in the Marcellus, in the Duvernay and in the Vaca Muerta, as we've shared the learnings and improvements that are emanating from the large-scale activity we have in the Permian, the economics on each of these are compelling.

The EURs are coming up and while the Permian, maybe the -- in the spotlight within our shale and tight portfolio, it's far from the only asset that we have. The other thing that I'd just note is we've begun a eight (ph) well appraisal program in El Trapial in the north of the Vaca Muerta.

We are currently producing in the southern area, Loma Campana but our folks are intrigued by the possibilities up in the north at El Trapial and we continue to prosecute that program, we've also picked up additional acreage in the (inaudible) 25,000 net acres where we're not operated with YPF and we've got a four well pilot that we plan to execute there in 2019 as well.

So great potential in Argentina and we really like our entire shale and tight portfolio, and again it brings some of the characteristics we've been talking about, which is short cycle time, attractive economics, low development costs and the ability to generate cash relatively rapidly. The last thing I'll say about that is it brings a much lower risk profile than multi-year, multi-billion dollar capital projects.

Phil Gresh -- JPMorgan -- Analyst

Okay. Thanks Mike and Pat. What was the amount of the co-lend there for TCO?

Patricia E. Yarrington -- Vice President and Chief Financial Officer

In 2018, the co-lend was zero.

Phil Gresh -- JPMorgan -- Analyst

No, for the 1Q guide, I'm sorry.

Patricia E. Yarrington -- Vice President and Chief Financial Officer

For the 1Q guide, OK. So I don't have a -- I guess I would say a confirmed number here for you because it will depend on what happens to price, it will depend on what happens and how cash flow that's generated from operations matches against the investment profile for the project, it will also depend on the dividend distribution requirements for the partners.

But I think order of magnitude, if you go back and you look at 2016 when we first started the co-lending, that was about $2 billion and I think as a order of magnitude starting off phase maybe think about $2 billion for this year.

But as I said we reserve the right to change that number as the year progresses and we see what actually happens to prices and the investment profile, and as -- you know, discussions are under way on dividends.

Phil Gresh -- JPMorgan -- Analyst

Thanks, Pat.

Michael Wirth -- Chairman and Chief Executive Officer

Thanks, Phil.

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.

Michael Wirth -- Chairman and Chief Executive Officer

Good morning, Paul.

Paul Cheng -- Barclays -- Analyst

Mike, you talked about Argentina, wondering given the political environment, the infrastructure or lack of infrastructure over there, how quickly you think you can proceed with the development plan and any kind of timeline or the pace or the capital, outlook, that, any kind of data that you can share?

Michael Wirth -- Chairman and Chief Executive Officer

We'll probably talk about this a little bit more in March, Paul, but I'll just reiterate YPF has been a very, very good partner there. The Macri government is committed to improving the investment climate in Argentina and has instituted a number of reforms to encourage and support energy development in the country.

We have great resource there that's benefiting from the Permian learnings and competitive economics, multiple blocks that we've picked up and much of the production can actually stay in the country. So at this point, yes, the infrastructure is not developed the way that it is in the United States or perhaps North America more broadly, but there's a commitment on the part of the government to do that and we'll pace our development with the gas and liquids takeaway and market conditions.

So the realities on the ground in Argentina are a little bit different, but I got to say the resource is tremendous and we are very encouraged by the the policy reforms that have been put forth by the government.

Paul Cheng -- Barclays -- Analyst

And for Pasadena the refinery that you just bought, what's the game plan for that treaty. I mean, you're going to need to make significant investment upfront to bring them to the Chevron standard, because that facility probably has been under you (ph) at least for 20, if not 30-plus years and the labor relationship has been always very rocky. So then what is the game plan and how much is the upfront investment and (inaudible) are you going to run it as a full blown facility or that is sort of be an extension of Pascagoula.

Michael Wirth -- Chairman and Chief Executive Officer

Okay. So let me try to respond to that Paul as best as I can, we just executed an agreement this week. We don't expect to close here until somewhat later here in the first half of the year. So it's a little premature for me to lay out any investment plan, so we actually closed the transaction. In the due diligence we have satisfied ourselves that we can operate the facility safely and reliably at the standards that we would expect.

And so I don't think you should have any concerns there. It meets our kind of three primary criteria. One, we are getting it at a good price and I believe one of the ways that you'd take risk out of refinery acquisitions is you don't overpay, and I don't think that we're overpaying for the asset.

It's in a great location and that allows us to integrate to increasing light crude production, out of West Texas, it allows us to serve our markets in Texas with a product that we run through our own system as opposed to exchange or purchase product and it will allow us to optimize and integrate with the Pascagoula refinery.

The third thing is it provides good strong economics and because of our system and the three kind of strategic levers that I just talked about, we ought to be able to optimize that refinery as a part of our system in a way that is different than what the current owner can simply because they don't have those other assets in those other positions and so within our business this -- it fills a bit of a gap, it gives us the ability to capture value in multiple different dimensions and over time, we'll evaluate what investments we may choose to make there, as we would in any other refinery.

I would expect those to be relatively modest, I would expect them to be thoughtfully paced overtime and to fit within the level of spending that we've established over the past many years in our Downstream business.

Paul Cheng -- Barclays -- Analyst

Thank you.

Michael Wirth -- Chairman and Chief Executive Officer

Thanks, Paul.

Operator

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

Neil Mehta -- Goldman Sachs -- Analyst

Good morning, Mike and Pat and Wayne here. The first question I had was around Tengiz, in the latest on the project, are you feeling good about the timeline and thoughts on costs and the contingency as well.

Michael Wirth -- Chairman and Chief Executive Officer

Yeah, Neil. So I probably don't have a lot to add to what we've previously said on this, we're still on schedule. So, we're still targeting a 2022 start-up, as I think Jay mentioned on our third quarter call on site productivity has improved. We had a very good summer, the logistics are working very well as we're moving modules now from Korea to the staging points we can't move through the inland waterway system during the winter time because it freezes up, but modules arriving from Korea, from Italy, and from Kazakhstan, the quality levels are very high.

We're about halfway through the project, about 50% complete at this point and 2019 will be a key year. There's a lot of -- a lot of activity in terms of moving modules into the Caspian to the site.

A lot of fieldwork we'll see if these productivity gains can be built upon again in 2019 and it's certainly a year where we will reduce uncertainty. Jay is actually headed there this weekend, and will be there next week and when we get to New York in March, he will have had recent field visits to Kazakhstan and also to Korea, he was in Korea visiting the module fabrication yards last week and he'll be in a position to give you a very good insight into exactly where we stand and what our expectations are.

Neil Mehta -- Goldman Sachs -- Analyst

Yeah. Looking forward to that. And the follow-up, we just want to get some more color on the share buyback to follow up on Phil's question and I think most of us were expecting $750 million. It came in at $1 billion in the fourth quarter. As we think about the share buyback program, our view had been that this program would be a kind of a baseload $3 billion program into perpetuity, but you're demonstrating that you're willing to flex and lean into it, so can you talk about the philosophy behind that share repurchase program, is a higher run rate potential -- potentially be sustainable and how do you think about flexing it from a -- from a big picture and then a more granular perspective?

Michael Wirth -- Chairman and Chief Executive Officer

Yeah, I going to let Pat take that.

Patricia E. Yarrington -- Vice President and Chief Financial Officer

Okay. So Neil, thanks for the question, and I think the key word here is sustainability and what you saw with our increase was just our view of our future cash generation, the confidence that we have in our future cash generation and the belief that we could move that rate of quarterly purchase up to $4 billion. When we first initiated this back in the second quarter call, the points that I made were that we really wanted to have this be through the cycle and sustainable through the cycle.

And so that's really, we paid at $3 billion because we thought that would be supportable through any reasonable price environment. We obviously had stronger prices in 2018 and now they've come off a little bit, but we still feel very strong about our cash generation in 2019, and frankly in the years to come.

You will note -- maybe you won't note, but we did release an 8-K this morning as well that talks you the fact that our Board has ordered a resolution for a $25 billion share repurchase program, with no term limit.

So I think that $25 billion gives you an indication of the commitment that we have to this program. Our view about the sustainability and yeah, I think that should be a very strong message to our investors about our willingness and intent to boost shareholder's distributions.

Michael Wirth -- Chairman and Chief Executive Officer

Thanks, Neil.

Neil Mehta -- Goldman Sachs -- Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of Jason Gammel from Jefferies. Your question, please.

Jason Gammel -- Jefferies -- Analyst

Thanks very much folks. I wanted to ask a question about the cost structure of the Company and the reason I ask is, you've already taken a lot of cost out of the upstream, but you seem to be with divestitures and some explorations concentrating more and more into the highest quality assets. I'm just wondering if there is a potential to take further overhead out of the business through medium term shutting down regional offices, etcetera?

I mean, this seems to be right out of the Mike Wirth's downstream playbook of taking further cost out and enhancing returns through concentration.

Michael Wirth -- Chairman and Chief Executive Officer

Well, Jason, I'll give you a sort of answer, and the answer is yes. I think in a commodity business, you always have to be looking for efficiencies and I think scale matters and we need to continue to look for ways to control our own destiny, and a big part of that is moving into assets that have inherently lower cost structures and continually seeking an efficient overhead structure to support that.

I will tell you that not only can we do that through what I would call conventional means and the way that it's always been done, but technology today offers us the ability to do even more as we bring digital technologies into our business and can do things in a business that really grew up in an analog world, there's a lot of opportunity to find more efficiencies.

The other thing when you're growing your business, it's important to pay attention to unit costs, and we've seen unit cost come down significantly, we see this year another 2% reduction or so in unit costs and as you look out to 2020 and 2021, I think that number can go up even more in terms of the percent reduction or the other way to say, the unit cost can come down even more.

So we need to be prepared to -- to be competitive in an environment where prices are not what we look to and we'll continue to work on cost efficiencies across our entire portfolio.

Jason Gammel -- Jefferies -- Analyst

Appreciate your thoughts. Mike, just a very quick follow-up. Can you talk about the ramp up progress at Big Foot?

Michael Wirth -- Chairman and Chief Executive Officer

Yeah. So we've got the first well online and it's been performing very well, it came on in November of last year, the second well is being drilled and completed as we speak and we anticipate that coming on here in the first quarter and so -- so we'll steadily move through the process of adding wells at Big Foot and you can expect that to be part of the net production story in 2019.

Jason Gammel -- Jefferies -- Analyst

Appreciate your thoughts. Look forward to seeing you in March.

Michael Wirth -- Chairman and Chief Executive Officer

Okay, Jason.

Operator

Thank you. Our next question comes from the line of Paul Sankey from Mizuho. Your question please?

Paul Sankey -- Mizuho Securities -- Analyst

Good morning. You mentioned that you've done about a 150,000 acres of swaps sales I believe in the Permian, Mike -- I'm in an iPad by the way, so I was slightly caught off guard, I wanted just an update on where your final numbers are for Permian acreage and how you feel about that given that there's potentially some fairly major assets available. I guess you're strongly outperforming your volume targets, can you also talk about your returns there, because those concerns that you're perhaps not as leading edge as we might want you to be in terms of your Permian performance on a returns basis. Thanks.

Michael Wirth -- Chairman and Chief Executive Officer

Yes. So, we'll share a lot more detail In March, because as you can see the performance out of the Permian continues to be exceptionally strong. With the large land position that we have, we've got good currency and optionality to try to improve that because everybody is interested in drilling longer laterals, finding contiguous development areas and so with our 2.2 million net acres and 1.7 million in the Midland and Delaware Basins, we've got lots of levers with which to optimize our position and the nice thing about these transactions is they are truly win-win, because you can transact with other people, there's enough economic value creation that you're not trying to split a finite pie, but you're actually creating a bigger pie for both. Our currently disclosed resource there is 11.2 billion barrels that's a figure we would expect to grow.

And so, our confidence in the Permian is higher today than it was the last time that I spoke to you. When you're talking about returns, these -- we put out a data before on the returns that we're seeing and they're well up in the 35%-plus range as we've moved to longer laterals, a better basis of design and even in a modest price environment, we're seeing very, very strong returns. It's as good as -- good or better than anything else we could be doing.

We are returns driven, and I mentioned that in my prepared remarks and I'll reiterate that and it's returns across the lifecycle of the asset and it's returns across the entire value chain. And so, we're not looking to put the most wells online or have the biggest IPs, we're looking to get the best returns out of the system.

We paused at 20 rigs, for several years, we've been telling you, we're going to grow to a 20 rig fleet and as you go through that kind of growth, you stress the system a little bit and so we're pausing in terms of adding rigs at this point in order to ensure that anything that needs to improve from a more performance standpoint will, we engage in regular benchmarking within the basin.

We have a number of non-operated joint ventures where we've got really good visibility into what other operators are doing and what levels they're performing at, and I'll simply tell you that we are continuing to improve performance in every dimension and intend to continue to and using benchmarking to identify the areas where we can get better.

So Jay will talk a lot more about this in March, we'll have a breakout session that will give you a chance to go into detail with questions as well, but we feel like we're delivering better performance and, you know, across the value chain, I mentioned we've been well situated with takeaway capacity and we've added capacity already in 2019.

So we're able to capture margin across the value chain and later this year that will include refining margin.

Paul Sankey -- Mizuho Securities -- Analyst

Thanks, Mike. And we know also that you've got an advantage mineral right position there, which seems to be one of the issues with any potential major deals that might occur in the Permian in the near future.

Mike, if I could ask you another one, I was going to make some elaborate joke about you keeping it competitive by not having just the CEO on the call, but also the CFO obviously, referring to Exxon's CEO being on the call this morning.

There is a major -- the number of major differentiations between the two companies and one of them is, your flat CapEx outlook. I think that you would do well to maintain that, I think it is a relatively long-term outlook as it stands, you just drifted toward the top of the range, without going above it.

What are the prospects you've actually seeing falling CapEx and CapEx that surprises to the downside going forward, given that your growth trajectory looks very good for a Company of your size. Thank you.

Michael Wirth -- Chairman and Chief Executive Officer

Yeah, so we are committed to capital discipline. We can grow our business at modest capital levels and we've got more good things to invest in, than we will invest in. And last year, there were two notable examples we relinquished our rights to the Tiger's development project in the Deepwater Gulf of Mexico, not because it's not a good project, not because it can't generate a return, but we have -- we have better opportunities within our portfolio. Same thing with Rosebank, a good project, a lot of resource, but one that that probably fits better for someone else than it does for us given our alternatives to invest and so we will continue to make those kinds of choices.

The one thing that came up in the call earlier were the other shale and tight opportunities and those are really economic as well. And so there's opportunities for us to whether you're talking on the Permian, or some of these other areas over time to find highly attractive opportunities to invest further capital, generate strong returns, minimize execution risk, short cycle and you know as our portfolio grows, we were up 5% in the production, two years ago, 7% last year.

We've just outlined 4% to 7% this year, a growing portfolio over time does require modestly higher base capital spending that would go with that, and so we are committed to capital discipline and I think you've characterized our ability to grow it at relatively flat capital, well.

We'll update forward views beyond what we've already articulated when we get to the March meetings. Thanks, Paul.

Paul Sankey -- Mizuho Securities -- Analyst

Thank you.

Operator

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

Blake M. Fernandez -- Simmons Energy -- Analyst

Hey folks. Good morning. Two questions for you. One, could you talk a little bit about Venezuela? I know it's early days, but obviously, you do have exposure there both upstream and downstream, and just any helpful thoughts that might help us out on our end?

Paul Sankey -- Mizuho Securities -- Analyst

Yeah, I can give you a quick update on Venezuela, Blake. The first and most important thing for us is the safety of our people on the ground, and so that's what we're really focused on. We also want to be sure of the operations where we have an interest are safe and environmentally sound and I can tell you that is the case. We've worked closely with the government to be sure that we understand the intent of the sanctions within a number of new general licenses issued by the Treasury Department.

And so we are in close consultation to be sure we understand them and how they are to be applied and I will say that the US government has been very interested in engaging with us to understand our position on the ground and we continue to operate and I think for the foreseeable future, we feel like we can maintain a good stable operation and a safe operation on the ground in Venezuela. If you look at it from the downstream side in the US, Pascagoula is the one refinery of ours that tends to run Venezuelan crude, and it runs kind of 70,000, 75,000 barrels, give or take.

For some time the prospects of actions like this have been clear and so we've had contingency plans in place, we've got alternate sourcing. We've got plenty of crude in tank for Pascagoula, we've got crude on the water there and so we're good here for the balance of the first quarter and maybe even a little bit beyond and we've activated our contingency planning into a full-scale execution right now.

So we'll keep the refinery full with crude, we'll optimize and I think we feel like we're going to build and navigate through this, our biggest hope is for stability on the ground in Venezuela and in the safety of not only our employees, but our contractors and the people in Venezuela.

Blake M. Fernandez -- Simmons Energy -- Analyst

Okay, I appreciate that. The second question, I know you've kind of covered Pasadena, and we'll get some additional color in March, but just more broadly speaking, I think you've kind of alluded to a potential acquisition of a refinery on the Gulf Coast for some time.

The size of this is 110,000 barrels a day or so, which isn't small, but it's not really large in context of some of the Gulf Coast facilities, does this satisfy kind of your appetite or integration potential there or do you think there is additional scope to kind of expand that over time?

Michael Wirth -- Chairman and Chief Executive Officer

You know, I don't want to speculate. We've got one transaction here that we've signed an agreement on. The key is value and the ability for it to not only yield value on a stand-alone basis, but to integrate into our network and be sure we can capture value out of that, and so we're focused on that with the Pasadena Refinery and I think I'll just -- I'll leave it at that.

Blake M. Fernandez -- Simmons Energy -- Analyst

Excellent. Thank you, Mike.

Michael Wirth -- Chairman and Chief Executive Officer

Thanks Blake.

Operator

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

Roger Read -- Wells Fargo -- Analyst

Yeah, thank you. Good morning. I know all the really fun stuff has to got to wait till March, but maybe to take a look at your CapEx mix, you mentioned 70% has a two year or a less waiting to cash flow whereas the rest obviously longer.

Do you think as we -- not so much look at a total CapEx number, but the mix within that CapEx, does that start to change back over the next couple of years, I'm thinking, number one, you signed a long-term deepwater rig contract obviously aimed at -- at some of the more challenging parts of the deepwater Gulf of Mexico.

So as things like that start to come in and we see that start to move maybe to more of a 50-50 on CapEx or is, is that something you want to maintain maybe more at the 70-30 level as we think over the next several years?

Michael Wirth -- Chairman and Chief Executive Officer

Yeah, Roger. It's a good question, because our mix has shifted very dramatically from where it was not long ago and it has come down by 50% from the high watermark and it has shifted in terms of its makeup, I think both really important issues, and going back to Paul Sankey's question, I think that is the new normal for us. We've got in this year's budget, a little bit over $5 billion for shale and tight, $3.6 billion in the Permian, $1.6 billion on other shale and tight and over time, I think that number is likely to grow rather than shrink.

We've got FGP, which is in the peak spending years this year and next, and so that's a non-trivial amount, a little bit over $4 billion in this year's budget, and so as that moves past the peak and comes down, it creates room for other things and that could include deepwater.

It could include more shale and tight or other major capital projects. On the deepwater, our intent would be to have a ratable development program and I think one of the things that we have learned over this past cycle or as I mentioned we have many large MCPs under way simultaneously is that, that introduces execution risk that is real.

And so our intent would be to have a balanced approach as we go forward and not to find ourselves so overly skewed to that kind of risk that it becomes an issue that's difficult to manage and because we've got the really strong shale and tight portfolio, I think that, plus our base business, which again is -- requires investment, but is typically short cycle and equipped to go from capital spent to cash in the door, I think the kind of a range that we're in today is more likely to plus or minus be the range you would see in the future as opposed to something that flips back the other direction.

Roger Read -- Wells Fargo -- Analyst

Okay, thanks for that, and then just to beat the capacity in a refining horse a little bit harder here, part of the the acquisition indicated some undeveloped acreage.

Are we wrong to think about this as just a refining acquisition and maybe you should think about it more as an infrastructure opportunity across the board, taking (ph) we're moving more and more toward crude exports from the US.

Michael Wirth -- Chairman and Chief Executive Officer

No. I think there's a reason we disclosed that, because the asset there is not simply the refinery, but it's the port access, it's the tankage (ph) and it's the land, and as I mentioned a couple of times that our goal is to integrate this into our system, that means our upstream system, our Downstream system, our trading system, and when I was a young pup, one of the lessons I learned from a seasoned engineer and one of our refiner is he said, you know the cheapest process you know that we have in this refinery is called the tank, and so there are times when we can fall in love with building complex equipment, and there are realities that you can create optionality and margin through infrastructure and in commercial activity at relatively low investment.

And I think this asset offers us the opportunity to not just participate in the refining margin, but also to look at the other ways that through our integrated system we can capture value across the entire value chain, both Up and Downstream and that's the way we're approaching this.

Roger Read -- Wells Fargo -- Analyst

Great, thank you.

Michael Wirth -- Chairman and Chief Executive Officer

Thanks, Roger.

Operator

Thank you. Our next question comes from the line of Sam Margolin from Wolfe Research, your question please.

Sam Margolin -- Wolfe Research -- Analyst

Good morning, how are you? Mike I'm going to try to not ask you to say the same thing again in a different way, but I'm -- one of the outcomes of the much fashion expected Permian growth is maybe that the free cash flow profile of the Permian, as a stand-alone entity has been pulled forward significantly.

And I don't know, maybe that's sort of an obvious statement or it's not new, but it seems like that's a important pendulum swing, with respect to how you might think about additional long cycle projects. So among all these other factors that are sort of that you commented on, and pointing you to thinking about expanding the portfolio in deepwater or other long cycle areas.

Is that something that's important to, or is that more something that's on plan and you're just thinking about that within the buyback and the dividend growth and other sort of uses of cash that are out there.

Michael Wirth -- Chairman and Chief Executive Officer

Yeah. So I think the increased performance of the Permian is a good news story. We did spend a little more capital last year, because we're finding that we can drill more hole, we've changed our basis of design. So little bit of the capital overrun was related to the good news story that we're getting a lot more production out of the Permian, and our guidance has been we're free cash flow positive in 2020, and that's -- I think that's still a good way for you to think about it. As we reach the crossover point, it crosses over and we've increased the dividend, that Pat has already addressed the confidence in increasing the rate at which we're repurchasing shares and our intent to sustain that through the cycle.

Having strong free cash flow creates alternatives and we intend to use the free cash flow to be very mindful of the need for shareholder distributions and also to look for good investment opportunities. I mentioned, we were able to meet all four priorities this last year in terms of dividend, investment, balance sheet and share repurchases and our intent is to continue to respect that going forward. This kind of growth in free cash flow allows us to do that.

Sam Margolin -- Wolfe Research -- Analyst

Okay. And just on a related note, I guess this one is for Pat. Is there a -- your leverage came down a lot, is there a target leverage to think about conceptually or is it just something that's going to be a function of commodity prices at the -- in terms of the rate at which the balance sheet fluctuates here?

Patricia E. Yarrington -- Vice President and Chief Financial Officer

Right. And Sam we don't have a target leverage rate. We think of the balance sheet as being the outcome of other previously outstanding decisions about how we've used the cash that we're generating, as I've said in the past, maybe a 20% leverage ratio on average through the cycle and that when you're in the stronger price environment, you'd obviously build back your balance sheets and when you're in a weaker price environment, you'd use it.

And so I think that's really what we're trying to, that's kind of the sweet spot or the sweet area that we're trying to play in, having a good balance sheet, it's a good insurance policy and having a good balance sheet allows us for both dividends and share repurchases to sustain those through any period of price weakness, and we feel that that's an important component.

Michael Wirth -- Chairman and Chief Executive Officer

Thanks, Sam.

Sam Margolin -- Wolfe Research -- Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of Alastair Syme from Citi. Your question please.

Alastair Syme -- Citi -- Analyst

Hi. Thanks for taking my question. Really just one on your view on the state of the Gulf Coast chemical polyethylene market and how that makes you think about the potential expansion plans. Thank you.

Michael Wirth -- Chairman and Chief Executive Officer

Yeah, we're still -- we're still very positive on the petrochemical investment opportunity and particularly here in the United States, it's -- I think it's a good long-term story. We've seen some pressure on margins here recently feedstock costs in the third quarter were up, I think all of and chain margins have been under a little bit of pressure, but these things happen in commodity markets with long cycle times for projects and in kind of ebbs and flows in the economy.

So that hasn't fundamentally changed our view on the attractiveness of the sector.

Alastair Syme -- Citi -- Analyst

Great. Thank you very much.

Patricia E. Yarrington -- Vice President and Chief Financial Officer

Thanks Alastair.

Operator

Thank you. Our next question comes from the line of Doug Leggate from Bank of America Merrill Lynch. Your question, please.

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

Thanks, good morning everyone, and Mike, we always appreciate you getting on these calls. So thanks again for doing it this time around. Mike, my question might actually be for Pat. Pat, you talked about the $13 billion-plus of cash spending.

Can you give us an idea as the affiliate spending rules rolls off with Tengiz completed, how do you anticipate that cash CapEx to trend, excuse me, given that you're holding the line on the $18 billion to $20 billion absolute spending at least through 2020.

Patricia E. Yarrington -- Vice President and Chief Financial Officer

So, I think Mike to answer that question in a way although he didn't split out cash versus total headline C&E, but as you see TCO spending come off, and as we move toward first production there in 2022, the other affiliate where we have potentially investment opportunities would be CPChem, and so that's what occurs in that particular category will be a function of how decisions are made on final investment (Technical Difficulty).

So it's not something that I can predict with any degree of certainty. I think what's important is that the summation of both, what I would say Company owned and operated, and affiliate owned and operated, we are staying within that $18 billion to $20 billion C&E range for the -- for the near term here, certainly, and we'll give you an update in March on a prospectively longer period of time.

So I think capital discipline is a theme that you want to read through all of this and the fact is that we have the opportunity to be very judicious and very selective about how we work in additional projects into our queue.

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

I know it's a tough one to answer, but given all the variables, my follow up is kind of related, I guess, but if you go back to 10, 11, 12, through 14, 15, obviously a lot of big (ph) -- yourselves included were spending much higher levels, than you are today, and one assumes that, that created a lot of cost recovery bars in some of the PSC. So I guess my question is to the extent you can, as we look forward in light of Thailand, how do you see your entitlement bars (ph) trending if you maintain that CapEx at these levels. Do you start to see cost recovery (ph) barrels peel off, and if you could maybe offer some quantification of that, I'd appreciate it.

Patricia E. Yarrington -- Vice President and Chief Financial Officer

Doug, I don't think we've got numbers here that we can isolate for you on that, cost recovery applies across a number of locations in our portfolio here, you're obviously aware of what's happened in Indonesia, so I don't think I have a pin-pointed answer that I can give you on that.

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

All right. It was worth a try. Thanks, folks.

Michael Wirth -- Chairman and Chief Executive Officer

Thanks, Doug.

Wayne Borduin -- General Manager, Investor Relations

All right, Doug.

Operator

Thank you. Our next question comes from the line of Doug Terreson from Evercore ISI. Your question, please.

Doug Terreson -- Evercore ISI -- Analyst

Good morning, everybody.

Michael Wirth -- Chairman and Chief Executive Officer

Good morning, Doug.

Patricia E. Yarrington -- Vice President and Chief Financial Officer

Hi, Doug.

Doug Terreson -- Evercore ISI -- Analyst

Hi, Mike, I have a question about portfolio optimization and specifically the divestiture part of the plan. And on this point you've got a pretty active program over the years, but you still also have a decent amount of value left in the Q. And so my question is this because the market for assets has softened somewhat or do you consider to be kind of normal course of business during the cycle? Or is it something else? So, any color on your divestiture program and the market trends you guys are experiencing is really the question.

Michael Wirth -- Chairman and Chief Executive Officer

Yes, I'm not a 100% sure I'm tracking with you there, Doug. We've always had a program of divestitures and --

Wayne Borduin -- General Manager, Investor Relations

Yes.

Michael Wirth -- Chairman and Chief Executive Officer

And you know, at times it's a little high, at times, it's a little bit lower, but in this business, you're continually looking to upgrade your portfolio, we've got some things now that are really attractive and I had earlier mentioned a couple of things that we stepped away from, because we didn't think they would compete for capital -- divestments are driven by a view on strategic alignment with our broader portfolio and our view of the future. The resource potential that remains in the particular asset, will it compete for capital within our portfolio, and there are good things as I mentioned earlier that cannot, and then can we received fair value. So that maybe a little bit of a function of what's the macro environment and the forward view on commodity price, but we are in a position that I think you can expect us to continue to high grade our portfolio.

Doug Terreson -- Evercore ISI -- Analyst

Yes. So, Michael -- maybe I should ask it differently. So it seems like you guys are experiencing healthy enough appetite for assets, if you're a seller, is that a good way to think about it?

Michael Wirth -- Chairman and Chief Executive Officer

Yes, we're -- everything we're talking to people about right now we think we are likely to receive very good value.

Doug Terreson -- Evercore ISI -- Analyst

Okay, thanks a lot.

Michael Wirth -- Chairman and Chief Executive Officer

Thanks, Doug.

Wayne Borduin -- General Manager, Investor Relations

Thanks Doug.

Operator

Thank you. Our last question for today comes from the line of Biraj Borkhataria from RBC Capital Markets. Your question please.

Biraj Borkhataria -- RBC Capital Markets -- Analyst

Hi, thanks for taking my question. It was just -- it was actually on the reserve replacement. In 2018 you had a 136%, that's a pretty impressive figure given the growth trajectory over the last few years. I was wondering if you could just disaggregate some of the impacts there, particularly on the price impact in terms of revisions from 2017 to 2018, and then what the key kind of moving parts were? Thank you.

Michael Wirth -- Chairman and Chief Executive Officer

Yes. So we did have another strong year, and our largest adds came through our Permian shale and tight activity through other shale and tight, and some these other basins we've been talking about, Gorgon and Wheatstone, so primarily in the unconventionals, good contributions across the board from Australia, Canada, Asia, Gulf of Mexico, Eurasia.

Our price was relatively small, negative revisions less than of -- less than 100 million barrels on price. We produced just short of 1.1 billion barrels, we sold about 60 million barrels.

So it was -- there was not a big price impact in there, and while unconventionals were the big piece, so we had contributions from others. The one thing that I would call your attention to is what we view as very high quality reserve additions, they are barrels that have bring with them lower risk, that's lower execution risk, and lower geologic risk, and lower breakeven prices, and so we would expect to continue to have a good strong reserve replacement story as we go forward given the quality of our portfolio, and the continued improvements that we see particularly in our unconventional development activities.

All right. Well, that is the top of the hour. I want to thank everybody for your time today, and I appreciate your interest in Chevron and everyone's participation on the call, and I look forward to seeing many if not all of you in New York City in March. Thanks very much.

Operator

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

Duration: 63 minutes

Call participants:

Michael Wirth -- Chairman and Chief Executive Officer

Patricia E. Yarrington -- Vice President and Chief Financial Officer

Phil Gresh -- JPMorgan -- Analyst

Paul Cheng -- Barclays -- Analyst

Neil Mehta -- Goldman Sachs -- Analyst

Jason Gammel -- Jefferies -- Analyst

Paul Sankey -- Mizuho Securities -- Analyst

Blake M. Fernandez -- Simmons Energy -- Analyst

Roger Read -- Wells Fargo -- Analyst

Sam Margolin -- Wolfe Research -- Analyst

Alastair Syme -- Citi -- Analyst

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

Wayne Borduin -- General Manager, Investor Relations

Doug Terreson -- Evercore ISI -- Analyst

Biraj Borkhataria -- RBC Capital Markets -- Analyst

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