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Chevron Corporation (NYSE:CVX)
Q2 2019 Earnings Call
Aug 2, 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 Second Quarter 2019 Earnings Conference Call. [Operator Instructions]. After the speakers remarks, there will be a question-and-answer session and instructions will be given at that time. [Operator Instructions]. I will now turn the conference call over to the General Manager of Investor Relations of Chevron Corporation, Mr Wayne Borduin. Please go ahead.

Wayne Borduin -- General Manager, Investor Relations

Thank you, Jonathan and welcome to Chevron second quarter earnings call and webcast. On the call with me today are James Johnson, EVP of Upstream and Pierre Breber CFO. 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 and important information for investors and stockholders on Slide 2.

Turning to Slide 3 and Pierre.

Pierre Breber -- Vice President and Chief Financial Officer

Thanks, Wayne. We had another solid quarter, the company delivered record production led by continued strength in the Permian Basin and we've done in Australia. Jay will provide more detail shortly. First, an overview of our financial results. Earnings were $4.3 billion or $2.27 per share. This is the highest reported quarterly results since the third quarter 2014 when Brent was over $100 a barrel. The quarter's results include special item gains totaling $920 million from the Anadarko termination fee and a tax rate change in Alberta. Foreign exchange gains for the quarter were $15 million. Excluding special items and FX gains earnings were $3.4 billion or $1.77 per share.

A reconciliation of non-GAAP measures can be found in the appendix to this presentation. Cash flow from operations was almost $8 billion, excluding working capital changes. We also maintained a strong balance sheet with a low debt ratio. Importantly, our continued strong cash flow allowed us to deliver on our commitment to return significant cash to our shareholders. During the quarter, we paid over $2 billion in dividends. And after terminating our agreement with Anadarko, we resume buybacks and repurchased $1 billion of shares during the quarter. Going forward, we expect share buybacks at the $5 billion annual run rate or 1.25 billion per quarter. In line with our updated guidance stated in May. We also continue to maintain capital discipline, with a focus on increasing returns. Year-to-date organic capex was $9.6 billion a little less than half of our $20 billion budget. Total capex, which includes acquisition costs that are unbudgeted such as the purchase of the Pasadena refinery totaled $10 billion.

Turning to Slide 4, cash flow was strong and the trend is in line with full-year guidance. Cash flow from operations, excluding working capital increase this quarter due to growing production volumes and higher liquids realizations as well as the termination fee received from Anadarko. Free cash flow, excluding working capital increased to $4.3 billion and supported the dividend, debt reduction and share buybacks. The Company's cash flow break-even remained in the low '50s on a Brent basis year-to-date. Asset sales proceeds added to our positive cash flow and further lower the break-even, while high grading our portfolio. Since the beginning of 2018, asset sale proceeds have totaled $2.9 billion and we remain on track to divest $5 billion to $10 billion of assets by 2020.

Turning to Slide 5, second quarter 2019 earnings of $4.3 billion increased about $900 million versus the prior year. Excluding special items and FX Upstream earnings were relatively flat as higher production was offset by lower realizations. Downstream earnings also were relatively flat as timing effects were offset by lower margins. The variance in the other segment was primarily the result of lower corporate charges.

Turning to Slide 6, compared to the first quarter, second quarter earnings increased by about $1.7 billion. Excluding special items and FX Upstream results were roughly flat, as higher listings in crude realizations were offset by lower gas realizations higher DD&A and other expenses. Australia gas realizations were lower, primarily due to lower LNG spot prices and a higher ratio of spot LNG sales. While the US gas realizations reflected weaker Henry Hub and Waha pricing. Downstream earnings excluding FX improved by about $520 million due to stronger US West Coast refining and marketing margins and timing effects, partly offset by the impacts of planned downtime. The variance in the other segment largely reflects lower corporate charges.

I'll now pass it to James.

James W. Johnson -- Executive Vice President, Upstream

Thanks, Pierre. On Slide 7 second quarter oil equivalent production increased 9% compared to a year ago, with shale and tight production increase in the Delaware and Midland Basins, and production from major capital projects increasing with the ramp ups at Wheatstone, Hebron and Big Foot. Our base business production increased as Gulf of Mexico and other deepwater brownfield developments more than offset natural declines across the portfolio.

Turning to Slide 8, second quarter production was strong at more than 3 million barrels a day for the third straight quarter. Year-to-date production excluding asset sales is about 5% higher than 2018. Consistent with our guidance of 4% to 7% growth as shown by the middle bar. Second quarter production was impacted by planned turnarounds and asset sales, which together had an impact of almost 70,000 barrels a day. Looking forward to the second half of the year, we expect production growth to be primarily driven by our shale and tight assets as well as the continued ramp up of Big Foot and Hebron. This growth will be partially offset by higher turnaround activity in the third quarter. Our full year outlook is expected to be in line with guidance, even before adjusting for the entitlement impacts of higher prices.

Let's turn to the Permian. In the next three slides, I'll provide some additional information regarding the attractive performance and the potential of this asset. Permian shale and tight production continues to track the guidance we provided at our 2019 Security Analyst Meeting. In the second quarter production was 421,000 barrels of oil equivalent per day, an increase of over 150,000 barrels a day or about 55% relative to the same quarter last year. The strong performance demonstrates our track record of consistent execution, and we expect to deliver 900,000 barrels per day in 2023 with a relatively steady rig count. Moving to the mix of crude oil, NGLs, and natural gas. About three quarters of our Permian production is liquids and half our production is crude oil, we expect these proportions to continue throughout the forecasted period

As discussed in the past, we have an advantaged royalty position across the Permian. And it's comprised of two distinct component, first we have a royalty benefit shown in the dotted blue wedge as our actual royalty rate is lower than the standard royalty rate. The second component comes from the royalty barrels shown by the hashed blue wedge which is the barrels we received from the acreage that we've leased to other producers. And of course these barrels require no Chevron capital. In total, these royalty contributions make up about 20% of our production throughout the five-year period and contribute to delivering our expected production profile.

Turning to Slide 10. Our work to reduce unit costs and increased productivity continues, we're optimizing our Permian factory and maintaining our focus on delivering industry-leading returns. This slide shows the progress we've made since 2016. As shown on the left, we continue to drive higher EURs by optimizing well spacing, landing zones, and completions. The average lateral length of our wells continues to increase and is expected to approach 10,000 feet next year, as we execute our core up strategy for our development areas. As illustrated in the upper right, these efforts translate into a sustained reduction in unit development and production costs. The chart on the lower right shows that the royalty benefit alone leads to returns that are about 10% points higher than a comparable well subject to the standard royalty burden. As we said before, our strategy in the Permian, is to be highly competitive in our execution leverage our midstream capability and use our advantaged royalty position to make us the clear leader and financial returns.

Slide 11, shows that we're well on our way, as stated in March we expect to be free cash flow positive next year. And we expect to grow free cash flow each year thereafter.

Earnings are expected to strengthen exceeding $4 billion in 2023. All of this assumes the same reference prices communicated at our 2019 Security Analyst Meeting. As the Permian production increases. We expect to see operational cash flow nearly twice the level of C&E by 2023 and a return on capital employed of about 30% all delivered by an optimized ratable factory with relatively low execution risk.

To more than double production, while being free cash flow positive every year starting next year, and generate returns on capital in excess of 20% along the way, shows why this is an attractive investment opportunity for our company and its shareholders. We're focused on value not volume and our true measure of success is building a sustainable business with strong free cash flow and growing returns.

Let's turn to slide 12. In the Gulf of Mexico, we have a robust portfolio that's performing well, generates good value and has attractive investment opportunities at each stage of development. We have a strong queue of exploration prospects that we're actively evaluating and maturing.

Earlier this year, we participated in the Blacktip exploration well, which resulted in a discovery near Perdido and Whale .The well encountered more than 400 feet of net pay and is within tieback distance. Whale and Ballymore are progressing through the appraisal phase to further assess the size of the resource. As mentioned in March, we're targeting unit development costs of $16 to $20 a barrel for new developments in the Gulf of Mexico.

Anchor continues to progress toward FID, which is expected by early next year. The technology we're developing to exploit these higher-pressure reservoirs will allow us to target other resource opportunities in the Gulf of Mexico. At Mad Dog 2, drilling and fabrication is progressing as planned and the project is expected to deliver first oil in 2021.

And we expect Big Foot and Stampede to increase production as we bring on additional wells. We're also pursuing highly economic brownfield developments at existing assets such as Jack St. Malo and Perdido. With our leading technology, experienced workforce and broad portfolio, we're continuing to add value in the Gulf of Mexico.

Turning to Slide 13. I had the opportunity to visit Kazakhstan again in June and we continue to make good progress with the Future Growth Wellhead Pressure Management project at Tengiz. The project's now 65% complete and remains on track for first oil in 2022. As we discussed at the March Analyst Meeting, this is another critical year for the project, as we're fully engaged with module fabrication, transportation and installation and that's our first full year of mechanical, electrical and implementation work at site. Detailed engineering and procurement are almost complete, reducing the risk of further impact on fabrication and construction activities.

We're on schedule to close out work at three of the four fabrication yards this year. The logistics system is working well and modules are being delivered, restacked and set on foundations. As reported in the media on June 29, one of our contractors at the 3GP site experienced an interpersonal conflict that resulted in the suspension of construction activity at the site for several days. Production operations and other FGP sites were not affected by the incident, and overall, the event is expected to have a relatively minor impact on project progress.

With respect to construction, we're just under 40% complete. Looking ahead, our focus continues to shift the productivity at site where we're seeing good performance from our workforce and steady improvement in productivity.

With that, I'll turn it back over to Pierre.

Pierre Breber -- Vice President and Chief Financial Officer

Thanks, Jay. Slide 14 highlights some recent commercial developments. First, through our joint venture, Chevron Phillips Chemical Company, we announced two new petrochemical investments, one in the US Gulf Coast and one in Qatar. Each is in the joint venture with Qatar Petroleum. The long-term fundamentals of chemicals are strong. We believe these projects offer attractive returns underpinned by advantaged feedstocks, world-class scale and leading technology.

Also in the quarter, we closed the sale of our interest in Denmark and executed an agreement to sell our UK Central, North Sea fields which we expect to close later this year. Additionally, we completed our acquisition of the Pasadena refinery which will enable us to supply more of our retail market in the region and process more domestic light oil.

In the renewable space, we recently agreed to purchase wind power to supply our Permian operations this is a cost-effective renewable energy alternative to our current electricity supply in the Permian .

Also Chevron executed an agreement to be an equity partner in CalBioGas, a joint venture to produce end market, dairy biomethane as a vehicle fuel in California. The project will capture methane that otherwise would be vented into the atmosphere and process it into renewable natural gas.

Turning to Slide 15. Our performance this quarter reinforces four key messages you've heard from us in the past. First, we have an advantaged portfolio that is delivering today and is positioned to do so over the long-term as Jay highlighted in the Permian Gulf of Mexico and at Tengiz.

Second, with continued positive free cash flow this year we have the strongest balance sheet in the industry, a low cash break-even and resilience if prices fall.

Third, we are disciplined with capital spending on-track with our budget and committed to increasing returns. And fourth, we have a total cash yield of about 6% with the resumption of our share buybacks. Bottom line, we are positioned to deliver superior financial performance to our shareholders consistently for many years to come.

Now looking ahead

Operator -- Vice President and Chief Financial Officer

[Operator Instructions].

James W. Johnson -- Executive Vice President, Upstream

We are sort of on Slide 16 again?

Operator -- Executive Vice President, Upstream

Checking to see if I can hear our speakers? Hello?

Wayne Borduin -- General Manager, Investor Relations

We're here. Thanks, Jonathan.

Operator -- General Manager, Investor Relations

Thank you. Would you like to take questions at this time?

Wayne Borduin -- General Manager, Investor Relations

I believe we were cut off prematurely, so actually we'll begin with Slide 16.

Operator -- General Manager, Investor Relations

All right. You may resume.

Pierre Breber -- Vice President and Chief Financial Officer

Okay. Thank you, Jonathan. This is Pierre and we understand that we cut off at Slide 16, so I'm going to resume there and we're going to look ahead. In Upstream, we continue to expect 2019 production growth to be 4% to 7%, excluding 2019 asset sales. Planned turnarounds in Kazakhstan and Nigeria and the North West Shelf and Australia as well as the early July hurricane in the Gulf of Mexico are expected to impact production in the third quarter.

Our full-year guidance for TCO co-lending is unchanged at $2 billion depending upon price, investment profile, and its dividends. In downstream, we expect high level of refinery turnaround activity in the third quarter which guides to an estimated after-tax earnings impact of more than $200 million. For the third quarter, we expect a repurchase -- we expect to repurchase shares at a rate of $1.2 billion per quarter.

With that, I'll hand the call back over to Wayne.

Wayne Borduin -- General Manager, Investor Relations

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

Questions and Answers:

Operator

Thank you. [Operator Instructions]. Our first question comes from the line of Phil Gresh from JPMorgan . Your question please.

Phil Gresh -- JP Morgan -- Analyst

Yes, hi, good morning. Can you hear me right?

Wayne Borduin -- General Manager, Investor Relations

Morning Phil.

Phil Gresh -- JP Morgan -- Analyst

Yes. So, I guess first question just looking at this Permian additional disclosure and your cash flow expectations, it seems like what you're implying here is that you can grow earnings and cash flow and the ratio of cash flow to capex keeps going up. So, it seems to imply pretty flattish capex profile, which I think is fairly consistent with the rig count trajectory you talked about at the Analyst Day. So, I was wondering if you could maybe just kind of walk through that detail.

And then secondarily with -- related to that I know you recently had an announcement that you made with enterprise talking about takeaway out of the Permian. I was just wondering how that all feeds into this ability to ensure you get the best realizations for your production. Thanks.

James W. Johnson -- Executive Vice President, Upstream

Okay. I'll take it and Pierre may want to add some at the end. From a capex standpoint, Phil, we are looking to maintain a relatively flat profile in capital and that's because essentially we're looking to have a very steady rig fleet as we go forward. We have 20 company-operated rigs. Those are basically on a 100% basis because we operate our own licenses. And then we look for about 30 roughly gross non-operated rigs, which equates to about 7 to 10 net non-operated rigs. So as we move that forward, we expect to see capital relatively constant. We're building out infrastructure of course and we always have some exploration activity out in front of us and we also do pilot work to ensure that we're continuing to drive to increase the recovery and efficiency of our developments.

In terms of the takeaway capacity, I'll break it into three different streams. I'll start with the crude oil and basically for 2019, we're well covered on our takeaway capacity for crude oil. In 2020, we are also covered for the year. There may be periods of tightness in length as we move through the year, but we recently executed an agreement with enterprise not only for takeaway capacity out of the Permian Basin, but also for export capacity that will lengthen our ability to supply crude not only in the domestic US, but internationally.

When we look at natural gas liquids, we have full takeaway capacity for this year and next year. And as we turn to gas, we really think of gas in two ways. The first is just basic flow assurance. We need to be able to move the gas without having to flare or have any threat of mitigating production in our avoidance of flaring. So we have 100% flow assurance set up for the balance of this year and next year. In terms of takeaway of gas from the basin outward for export, what we look at is, this year we're at about 20% of our gas can be exported from the basin. And by the end of this year, we expect to be about 25% by the end of next year we should be more like 60% of our gas being exported from the basin gives us more exposure to other price structures, rather than just the Waha .

Wayne Borduin -- General Manager, Investor Relations

Thanks, Phil.

Phil Gresh -- JP Morgan -- Analyst

Okay, great. That's helpful. Just my follow-up question then for Pierre would just be some of your balance sheet commentary. Your net debt-to-cap, I believe is a low since it's been since mid-2015. I know you increased the buyback a bit. There's the situation where you had an M&A considerations there that you walked away from, but I guess how do you think about that level of financial leverage? And where you want to keep that balance sheet for opportunities that might present themselves? Thanks.

Pierre Breber -- Vice President and Chief Financial Officer

Yeah. Well, thanks Phil. Look our cash generation has been strong and we've been returning cash to shareholders and we increased our dividend 6% early this year. As you mentioned we raised our guidance on the share buyback rate in May to $5 billion per year. We're being very disciplined with capital, managing to our $20 billion organic budget in 2019. So the way the math works, no doubt in the short-term, our strong balance sheet gets even stronger, that's OK, over time this strong cash generation will be returned to shareholders in the form of higher dividends and a sustained share buyback program, that's the way I would think about it. I won't comment on M&A. We obviously, have -- we're in a very financially strong position, same time we got a great value proposition for our shareholders that we've communicated at our March Analyst Day and then Jay provided more insight into some key elements today and that's what we're focused on delivering.

Wayne Borduin -- General Manager, Investor Relations

Thanks, Phil.

Phil Gresh -- JP Morgan -- 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

Good morning team. I guess the first question I have Jay, you just came back from Kazakhstan sounds like, there's -- there was some questions around labor productivity as it relates to Tengiz. Can you just confirm everything is on track, and then just in terms of the capital budget as well your confidence level in achieving the targets that you set out?

James W. Johnson -- Executive Vice President, Upstream

Yes. We just did come back in June and we talked about this at the Security Analyst Meeting and in previous calls. A big focus at site now is on labor productivity. We've got a lot of work to do as the modules come in or set on foundations. Last year we're primarily focused on civils and undergrounds. This year we're making the transition to mechanical, electrical and instrumentation. As we look forward we have to get through commissioning and then all the start-up activities. So we've put in place specific tools that can really help us, not only drive the productivity but understand what the drivers are, where we have gaps, from where expectations are and what we need to do to close those.

Those tools are now widespread across the site and are proving to be very effective, so we've seen steadily improving productivity across the workforce and are actually feeling pretty good about where the execution is headed at this point. But it's early days, we're 40%, roughly complete on construction and we've got a lot of man-hours to go over the next couple of years.

In terms of the overall capital program, you've seen we continue to be right in the middle, right on our guidance. We're about 50% expanded on our Chevron C&E through mid-year and we still expect to maintain our guidance of $18 billion to $20 billion for next year, so that should give you a pretty good idea of where things sit.

Neil Mehta -- Goldman Sachs -- Analyst

I appreciate this and as a follow-up question, this might be for you, Pierre. You've gotten a lot of credit for investors for stepping away from the Anadarko potential transaction and showing the capital discipline. Since the deal closed, the stock has materially outperformed other constituents of the XLE or EXOP to others, independent E&Ps and that multiple arbitrage or share price ratio arbitrage seems to be opening up again. Just want to get your thoughts on M&A, again it felt opportunistic, but is another opportunity potentially opening up here?

Pierre Breber -- Vice President and Chief Financial Officer

Yeah. I know. Thanks Neil. Look, I honestly can't speculate on M&A. What I can restate is we have a very strong value proposition for our shareholders. And if I can just -- some of the key elements that we communicated in March is 3% to 4% production growth guidance through 2023, a very disciplined capital program. Jay provided the 2020 guidance of $18 billion to $20 billion and longer-term guidance of $19 billion to $22 billion from 2021 to 2023. We have leading upstream cash flow margins, leading earnings margins and we're improving cash return on capital employed by more than 3%. So, we clearly do not need to do a deal. That said, as you said, we have been opportunistic in the past if we see a good strategic fit at a good price, at a good value. And two recent examples would be the Pasadena refinery and Anadarko. But we've moved on and we're focused on delivering --growing earnings and cash flows for our shareholder.

Neil Mehta -- Goldman Sachs -- Analyst

Thanks Pierre.

Pierre Breber -- Vice President and Chief Financial Officer

Thanks, Neil.

Operator

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

Alastair Syme -- Citi -- Analyst

Good afternoon. I just had a couple of questions. One, can you talk a little bit about Anchor, which you're hoping to do FID next year? What do you think has to happen to move that forward? Because my understanding is, there are still some quite significant technological challenges. And the follow-up, if you can just talk a little bit, it's just sort of a question, just on the asset sales, that you announced the UK asset sales in the quarter. Can you talk about what happens on the decommissioning of liabilities associated with those assets, please?

James W. Johnson -- Executive Vice President, Upstream

Yeah. So with Anchor, we are in the FID process, so this is doing all the preliminary engineering work prior to the detailed engineering. I would say there are two primary technologies to be developed to support Anchor. And in developing for Anchor, we'll also have these available for other opportunities that we foresee.

The first is just the high-pressured technology, getting to that 20,000-psi. That's well along and we really -- it really comes down to just thicker seal. We're in the qualification stages and we really don't see that as a major technology shift. It's just a matter of working through the process.

And the second is the higher hook loads for deeper wells and this will also support potential developments like Ballymore. So neither of those do we regard as a particularly challenging technological advance, but an important one to get finished. So we do expect to be on path with Anchor 4 FID early in the next year.

In terms of the North Sea deal, we really don't get into the details of any of our commercial transactions. I can't really comment too much on that, other than to say, as an overall package we're very comfortable with the transaction as its been constructed and are working with the buyer to move it forward to close.

Pierre Breber -- Vice President and Chief Financial Officer

Yes. And I think I can add to Jay's comments that are fully in tune with the importance of abandonment obligations and that's carefully considered in terms of the financial strength of the partners that are the parties that we transact with. And again, we won't be specific, because it's commercially sensitive, but as you can imagine a point of negotiated to meet negotiation and something that we don't intend to be exposed to over time.

Alastair Syme -- Citi -- Analyst

Thanks very much.

Pierre Breber -- Vice President and Chief Financial Officer

Thanks, Alastair.

Operator

Thank you. Our next question 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. And apologies, if I missed this on the call but, I have a question on LNG. You mentioned a higher ratio of spot LNG sales in the quarter. Could you just talk through what was driving that? One of your payers has talked about buyers for their contracts not taking their full nominations. I was wondering if that was the issue or there's something else there. Thank you.

James W. Johnson -- Executive Vice President, Upstream

Yes, thanks Biraj. I'll talk first in general because there's an element of -- as we gain in our performance, the facilities are performing very well, reliability is coming up, we have extra production over and above what we had planned and so all that production is going to be exposed to spot prices. And so that's going to be an ongoing thing.

In the second quarter specifically, we certainly had excellent performance at both Gorgon and Wheatstone. And so we had extra production coming from that. But at the same time we also deferred a turnaround, so we had a turnaround scheduled in the second quarter that's been moved to the fourth. So we had extra cargoes there that were exposed to spot.

We do have some downward flex that was exercised by our purchasers in the shoulder months and that occurred in the second quarter. And then finally, there's also an element even in our fixed-term contracts where we had about a 3 to 6 month delay in the oil pricing that they're linked to and so we saw some downward movement in that element.

So together those all really drive the realizations in the second quarter for our LNG. But as I say going forward, we do expect to see increased production as our reliabilities been higher and our overall goal would be to term that up and get closer to what our expected production is as we gain continued confidence in the reliability of the facilities.

Biraj Borkhataria -- RBC Capital Markets -- Analyst

It's a great color. Just a quick follow-up at Gorgon, in particular, I think in the past you had talked about debottlenecking the project increased capacity by maybe kind of 15%, could you just update us on where we are now a relative to the original nameplate?

James W. Johnson -- Executive Vice President, Upstream

Yes I don't recall us giving out specific guidance on percentages of increase. Our focus right now is doing a couple of things. First is just getting the reliability increasingly high and we've seen very good reliability. We're still learning these facilities as they continue to operate and we built learnings from some of the shutdowns and turnarounds that we've already accomplished in the future ones.

As we look forward, what we are looking at is we're collecting the data literally daily as we move through an annual cycle of the ambient conditions as well as the performance of the plan. We look for where the restructuring to keep us from going to the next level of production.

At this point in time, I'd say we're probably 2% above where we expect it to be on Gorgon production, around 6% above on Wheatstone. But it's an ongoing effort as we move forward to get more out of our existing investments and infrastructure.

Wayne Borduin -- General Manager, Investor Relations

Thanks, Biraj.

Biraj Borkhataria -- RBC Capital Markets -- Analyst

Thank you very much.

Operator

Thank you. Our next question comes from the line of of Jon Rigby from UBS, your question please .

Jon Rigby -- UBS -- Analyst

Okay, thank you. Yeah, and two please. The first is the Anadarko transaction during that process, I felt that you indicated that you had capacity and the willingness to deepen your deepwater participation globally and you spoke quite enthusiastically about adding extra LNG to your portfolio, creating a global position et cetera. So as you move forward with new opportunities and when they arise, is -- thematically outside of the US is that where we should expect you to be appearing or looking? And then the second, just very specifically, with the new refinery asset, what are the plans for that now you've got ownership of it? Thanks.

Pierre Breber -- Vice President and Chief Financial Officer

Yeah. Thanks, Jon.

Unidentified Speaker

Thanks, John. This is Pierre and I'll start. I said earlier we moved on, but look we'll go back to Anadarko a little bit here. Look there are several elements of it, the transaction there was the FID in the Permian, there was the FID in the Gulf of Mexico and there was the LNG. And there was the ability to get synergies out of the transaction and do it at an attractive price that we thought was good for their shareholders and good for our shareholders.

So that -- if you want to get into our thinking we're -- adding LNG is something that absolutely we are interested in doing. We've got a great position in Australia that Jay just talked about that's generating a lot of cash where we have opportunities to debottleneck and potentially add to that over time. And you'd expect that we are -- we're always working the portfolio and LNG is one of the asset classes that we're interested in and we'll pursue opportunities in that space. That makes sense for the company and our shareholders.

In terms of Pasadena, we've had three very clear strategic objectives on it. One was to provide some equity product into our retail network in Texas. The second was to coordinate and optimize feedstocks and other flows between Texas and our refinery in Pascagoula, Mississippi. And the third was to process more domestic light oil and increasingly try to position and retool the refinery a little bit to take more and more Permian oil. So really, I mean there -- it's very early days, but I'd say everything is on track and aligned with the strategic rationale. So there's been no surprise in terms of those three objectives. We feel we can meet them with the acquisition. We've had some early wins. In fact over the next few months we expect to run up to 30,000 barrels a day of Permian crude oil. That's a little more than we actually had thought at this point in time. Also we know there's work to do as expected on maintenance and reliability of the facility. So everything is on track and we feel good about it but it's early days. Thanks, Jon.

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. Hello guys. I had a couple on the Permian, slide number 10. I guess the first one would be, obviously, some fairly impressive absolute performance in increasing EUR and decreasing development production cost on an absolute basis. I know you do a lot of benchmarking. How would you say stack up against industry in those areas now?

James W. Johnson -- Executive Vice President, Upstream

Yes it's a good question, Jason. I think the -- we do, do a lot of benchmarking and this continues to be an evolving story. So I would say, we're competitive on these areas. We have a very good understanding particularly in terms of the type curves across the entire basin. We have the capability and actually run decline curves across not only our own, but competitors as well so that we understand how our wells are performing and we're actually very comfortable with the overall performance not only in terms of the recoveries, but the economics that we're generating from the execution work.

And then when that's coupled up with our ability to use our midstream capability and our royalty position, it's really giving us, I would say leading financial performance overall. So if you went back and look at our Security Analyst Meeting slides, we showed you some of the competitor data. We also showed you, how our actual type curves are performing relative to our expectations and they're very tightly coupled. So I think we have a good understanding, but we're seeing that continued improvement as we move forward.

Pierre Breber -- Vice President and Chief Financial Officer

Yeah, the only thing I would add to Jay's comments, this is Pierre, is look, I mean there that you can cherry pick a lot of data out there to position, how you look, we've been pretty consistent in what we've shown and also, we've done a lot not just general benchmarking by comparisons to our non-op partners are the operators on our behalf where we know we have very good apples-to-apples data. So it is an area of focus, and we feel we compete very well.

Jason Gammel -- Jefferies -- Analyst

That's great.

Wayne Borduin -- General Manager, Investor Relations

And maybe is this a follow-up?

Jason Gammel -- Jefferies -- Analyst

Yeah, just a quick follow-up. I noticed the average lateral length that's planned for 2020 is starting to approach 10,000 feet. In the past you've had fairly frequently slides about swapping another positioning to kind of block up your acreage. And if you're moving toward 10,000 feet, I'm suspecting you're getting a long ways toward doing that, but can you just kind of talk about whether there's further opportunity there?

James W. Johnson -- Executive Vice President, Upstream

Well as we continue -- in the existing development areas we're getting higher and higher on our average lateral length and approaching that 10,000 foot mark. In the areas that we've transacted, we had about 60,000 acres that we transacted in 2017 and 95,000 acres in 2018, those enabled -- about 1,900 longer laterals. So it's really helped us in our core-up development areas.

As we continue though to open up new development areas, we're going to continue to have this land activity as we optimize our land positions. So about half of our acreage overall, we consider to be a very highly productive areas and what we want to do is continue to use swap out or swaps and farm-out, sales, acquisitions to continue to core up our development areas. We try and do that in a timely manner. We don't want to get too far ahead of ourselves, but we do want to make sure that we're drilling efficiently as we start each area. As we said many times, our focus is on delivering returns not just chasing production or chasing a certain activity level.

Jason Gammel -- Jefferies -- Analyst

Thanks guys.

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. I was wondering if Jay, I could take advantage, you been on the call just a little bit in terms of the assumptions you made in the Permian on the cash margins, things have obviously deteriorated at no fall of your, you do in terms of NGLs and gas. So if -- how do you see the prognosis there? What assumptions were you making when you were talking about capex versus cash flow?

And I guess kind of the -- the last piece of that question is 900,000 barrels a day at a 3.3, 3.4 in 2023 suggests that your cash margin across the portfolio could move away from this sort of sector within level you've had in the past. I'm just curious if you can offer any thoughts on that? I've got a follow-up please.

James W. Johnson -- Executive Vice President, Upstream

Well, the cash -- the assumptions that we provided that are all given in our Security Analyst Meeting deck, so you can go back and reference those. And what we're trying to do is, continue to make sure we have the flow assurance as I mentioned earlier on the call, to move gas out to other markets and not have it captured in the immediate basin. Crude oil, we're already well ahead of that. We move our crude outside the basin and we can access and optimize the markets that we're reaching.

In terms of the cash margin overall, again we've given you that information we see that is very strong. There's always going to be fluctuations in the market as there is tightness in length in different locations, but overall we feel pretty strong about where we're heading with this as a production base, but also the other production we have around the world.

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

Okay. I understand, it's -- there's a lot of moving parts in that. My follow-up is kind of related and it's historically when oil prices got a lot weaker, you guys talked routinely about what your sustaining capital was in the portfolio. And obviously, that has been reset favorably by the very large LNG projects and those kind of dominate the base -- the base decline and like thereof. As you move toward, again, this level of funding a significantly larger proportion of your production and a high decline underlying unconventional asset base, what does that do to the sustaining capital versus, I think, you used to talk about like a $13 billion number, how does that evolve as we move toward the five-year plan?

Pierre Breber -- Vice President and Chief Financial Officer

Doug, yeah. This is Pierre and I'll start and ask Jay to add some comments. We've never really talked about sustaining capital we've given -- we have a $20 billion capital budget this year that we talked about $18 to $20 billion guidance next year. And then $19 billion to $22 billion, 2021 to 2023. So the guidance is pretty clear it's pretty tight. That results in enterprise that's growing 3% to 4% of production growth through 2023 with -- with leading cash margins.

So, the prior times we've talked about the base decline, we are investing in the unconventional, as you saw in the Permian that it's -- the production is more than doubling, while it's being free cash flow every year, starting next year, at returns that are going from 20% to 30%.

So we feel really good about our position. We're not focused on keeping a base flat capital. We're focused on increasing returns. It's resulting in an outcome of higher production. That's translating to higher earnings and cash flow. But the high decline that you referred to is, it's a nature of the business. But when we're investing in it, you can see that, we're more than offsetting that decline and we're doing it in a very economic manner. And as we continue to fill out facilities and keep facilities filled over time, the reinvestment is a very attractive use of capital for the shareholders.

Jay Johnson -- Executive Vice President, Upstream

I might just build on what Pierre said, because he's absolute right. As we have a larger percentage of our overall production constrained by facilities, that means we have the ability to be very stable on our production. And the same in some respects actually applies in the Permian, while any individual well may have a relatively high decline rate, it does approach an asymptotic curve, but the facilities we install for each of the development areas, our goal is to keep those full. And one of the advantages of the Permian is that, in the initial drilling we fill the facilities up, but then we can go back through infill drilling programs and by going after the subsequent benches in a given development area, and just continue to keep those facilities full, and the amount of rig activity it takes is much less for those subsequent drilling campaigns to maintain that production in a given development area.

So I actually feel pretty good about where the whole portfolio has moved and really I'm not too worried about what some people see as a problem with these individual Permian wells.

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

So it's a great answer guys, thanks for taking my questions.

Wayne Borduin -- General Manager, Investor Relations

Thanks, Doug.

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.

Wayne Borduin -- General Manager, Investor Relations

Morning Roger.

Roger Read -- Wells Fargo -- Analyst

Let me just to dive in here, kind of following up on some of the Permian questions with your royalty position and others developments and with some of the problems we're seeing from some of those E&Ps any risk to your outlook from those who might have overstepped their balance in terms of the way they were developing the Permian?

Pierre Breber -- Vice President and Chief Financial Officer

Well, Roger this is Pierre. I mean, you're right. I mean we don't control the royalty barrels because that's being operated by others who own the working interests we're landowner and as Jay said, we receive those barrels with no capital, no operating costs. But the flip side is that if we don't control the development, so we're doing it based on an outlook and an expectation, it certainly we know what the actual had been. But you're right that there is some risk of that. It could go either way. It could go bigger or lower than what we're showing dependent on what those operator's activity levels are.

Roger Read -- Wells Fargo -- Analyst

Okay, great. And then from a guidance standpoint on the downstream, the hiring refinery turnaround activity, and for the third quarter I was under the impression you'd had fairly high turnaround activity earlier in the first half of this year. So I was just curious was that the right interpretation, and maybe if there's any geographic specific exposure on the high TARs at this quarter?

Pierre Breber -- Vice President and Chief Financial Officer

Yeah Roger, so we have now adopted a practice of giving a pretty clear guidance on planned turnaround activity in the downstream and we characterize it as either a low, medium or high. So you're right. Second quarter was high. And that's related to $200 million of after tax, earnings impacts both from higher cost and from lost profit opportunity if the volume is not produced.

First quarter was actually low, which is up to $100 million of effects. So in the third quarter with another high quarter that's not unusual, it just depends on how the planned turnarounds are set up. We won't provide specifics on the locations. It's commercially sensitive. And so it's just something that we won't do ahead of time, we're happy to talk about it.

Looking backs on the second quarter, we had some planned turnaround activity in Pascagoula and in Asia. So we can explain afterwards, but we think we're giving pretty clear guidance. So you're right that you should view the earnings -- after tax earnings impact of planned turnarounds in 3Q to be the same or similar to 2Q.

Roger Read -- Wells Fargo -- Analyst

Pierre, I'll leave it there. Thanks.

Wayne Borduin -- General Manager, Investor Relations

Thanks Roger.

Operator

Thank you. Our next question comes from the line of Paul Cheng from Howard Weil. Your question please.

Paul Cheng -- Howard Weil -- Analyst

Hi good morning. Jay, since you are here and I think you mentioned in your prepared remarks about the -- in Tengiz with your contractor at least in the media, it seems to me that there's never been more serious talking about -- a between the foreign contractor and the local people and may even be different agenda. Can you give us little bit more update on that and what does any initiative had been taken trying to resolve the problem there?

James W. Johnson -- Executive Vice President, Upstream

Yes, Paul, I can give you a little bit more. We -- this is really centered around one particular contractor that was at the 3GP site and there was obviously some disagreements between some of their workers and the management of that company. When the issue happened, we shut down the entire site, the 3GP site, not the other site that didn't have any impact on production operation, but we wanted to make sure that the problem was mitigated and contained and we understood what was at the root of it. We worked with that contractor. They're putting in place corrective actions to make sure that they deal with some of the concerns that were there. That is the only contractor that's had an extended ramp-up, so they're working back to their normal strength and we expect to see them that normal strength by the end of August.

So, at this point in time, we don't see it as having a material impact on the overall progress of the work. That contractor was about one month ahead of where we expected them to be on their workflow. So, unfortunately we've used up some of that float that have built up, but we believe we're going to be able to mitigate the impact to us. The worker and the workforce relations are always important to us and this is one that we continue to stay focused on. It's very important as now our focus continues to shift to site and I assure you we'll stay focused with our workforce to make sure that we're trying to anticipate and deal with any other concerns.

Paul Cheng -- Howard Weil -- Analyst

And the second question Jay. I think in Angola Block 14, I think that the exploration is 2023 and in Nigeria, the Agbami, I think is 2024. When you guys will start the process for negotiation on those?

James W. Johnson -- Executive Vice President, Upstream

Well, that's not something we normally are going to talk much about publicly, Paul, that's between us and our partners and the government. So I can tell you that those discussions and the planning for that is well in hand, but I really won't be able to go into much detail on those at this time.

Paul Cheng -- Howard Weil -- Analyst

Okay. Understand. Thank you.

Wayne Borduin -- General Manager, Investor Relations

Thanks, Paul.

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. Hi.

Wayne Borduin -- General Manager, Investor Relations

Hey Sam.

Sam Margolin -- Wolfe Research. -- Analyst

So, in the Permian one of the things that you talked about contributing to your rig count staying relatively flat is that you're building up a nice stack of vintage wells and you've got some legacy production that's supporting the performance of new wells. Just really quickly Jay can you shed some light on the performance of those older wells? It sounds like you're leading edge wells are meeting your expectations, but how are the vintage wells doing as far as how are they holding up and as they get a little long in the tooth?

James W. Johnson -- Executive Vice President, Upstream

Actually they're doing quite well. Our focus from day one has been to maximize the returns that we can get from our investments in the Permian. So there has been a lot of questions. Why don't we increase our rig fleet, why don't would be more aggressive? But the reality is we continue to learn as everyone in the industry is as we move forward. And I think a lot of the moves we've made to stay focused on returns now are paying off.

Many people talk about how high their initial production rates are in the first 6 months rates, but what we're really looking at that can actually damage wells and cause aggravated decline curve. So we're looking at the total expected recovery, we're looking at the economics of the well over its life. Very careful in our drawdown rates in those early months to make sure that we don't cause damage in a well bore in the formation. When we put all that together, we're seeing our base of production, that is the production that's already online continuing to perform such that when we drill these new wells, we can add that on top. And as you saw from the chart I believe it was on probably page 9, we've been able to continue to deliver right on our production profile and we feel very, very good about how our wells are performing.

Sam Margolin -- Wolfe Research. -- Analyst

Thank you so much. And then -- this one should be relatively quick. I just -- in reference to the the strategic partnership between CPChem and Qatar Qatar's got a portfolio of other things that Chevron is probably a good candidate to participate in. Do you see that relationship deepening as you kind of advance on the chemical side throughout the Chevron organization? Or do you see that siloed into Chems?

James W. Johnson -- Executive Vice President, Upstream

No. No. Look, we have a good relationship with Qatar Petroleum for sure and so do CPChem. And when the Qataris look at CPChem they look at it as three companies, right; Chevron Phillips, Phillips 66 and ourselves. And so, we have a good relationship with them. I will say that the deals stand on their own. I mean the project in Qatar was bid out US Gulf Coast. Again, there is other alternatives that are considered. So each transaction stands on its own, but we're very proud that we have this platform with them and whether that leads to other opportunities are not I won't speculate but we certainly have a good base to work-off of.

Sam Margolin -- Wolfe Research. -- Analyst

Thanks so much .

Operator

Thank you. And our final question comes from the line of Pavel Molchanov from Raymond James, your question please.

Pavel Molchanov -- Raymond James -- Analyst

Thanks for taking the question. You alluded to the gas takeaway issues in the Permian and that you were trying to avoid flaring as much as possible, but of course your realized gas price was $0.60 in Q2. So I'm curious if it might get to a point where you have no practical choice but to either flare gas or shut in wells. And if that happens, which would you choose?

James W. Johnson -- Executive Vice President, Upstream

We don't flare. We are not flaring and we haven't flared. Our policy is that, we find flow assurance as I said is our first priority so that we can move the gas and we've been doing that. And we've got that flow assurance covered. So I don't see us being forced into the choices that you just presented. I do -- as I said earlier, we're going to be increasing the amount of export capacity out of the basins to try and achieve better realizations and that's part of our overall strategy to maximize the returns that we can get from our investments in the Permian.

Pavel Molchanov -- Raymond James -- Analyst

Okay. And then based on what I just asked, but taking a much broader perspective, you're talking about reducing carbon emissions, just about every other US oil and gas producer is talking about the same. When we listen to what's being said on stage at the debates, I'm sure you saw this week that point seems to be lost on the policy community. And I'm curious what -- what you think the industry has not communicated that is -- or what the dynamic is that has led to this disconnect between what you're saying and what the policymakers seem to be believing?

Pierre Breber -- Vice President and Chief Financial Officer

Well Pavel that's a -- that's a big last question on the call here. Look I mean, it depends which policymakers right. We're in the midst of a energy revolution renaissance here in the United States. For sure, wind and solar is a big part of that, but what's going on in the Permian Basin, what's happened in the Marcellus and Utica and growing natural gas production, growing crude oil production, exports to world markets and all the geopolitical implications and benefits of that, you can see our President talk a lot about that.

At the same time, if we shared the concerns on climate change. We referred on the earnings call to a couple of investments that lower the carbon intensity of our operations. It was wind PPA in the Permian, so we -- our consumer electricity are using renewable electricity there, lower the carbon intensity of our operations and the renewable natural gas, which is in California, which takes Methane that otherwise would be vented to the atmosphere processes it, puts it in the grid. I guess we have off-take agreements with trucking company. It generates low carbon fuel standards under the California Regulatory Regime. It's modest capital. It earns an attractive return, so it's something that we believe is good for the environment and good for our shareholders. So we look to do more of that. We'll be very balanced, but -- it's a big question, and we'll be part of the conversation.

James W. Johnson -- Executive Vice President, Upstream

Thanks Pavel.

Pavel Molchanov -- Raymond James -- Analyst

All right. I appreciate it.

Wayne Borduin -- General Manager, Investor Relations

Well, I'd like to thank everyone for your time today. We do appreciate your interest in Chevron and everyone's participation on today's call. Jonathan, back to you.

Operator

[Operator Closing Remarks]

Duration: 65 minutes

Call participants:

Wayne Borduin -- General Manager, Investor Relations

Pierre Breber -- Vice President and Chief Financial Officer

James W. Johnson -- Executive Vice President, Upstream

Unidentified Speaker

Jay Johnson -- Executive Vice President, Upstream

Phil Gresh -- JP Morgan -- Analyst

Neil Mehta -- Goldman Sachs -- Analyst

Alastair Syme -- Citi -- Analyst

Biraj Borkhataria -- RBC Capital Markets -- Analyst

Jon Rigby -- UBS -- Analyst

Jason Gammel -- Jefferies -- Analyst

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

Roger Read -- Wells Fargo -- Analyst

Paul Cheng -- Howard Weil -- Analyst

Sam Margolin -- Wolfe Research. -- Analyst

Pavel Molchanov -- Raymond James -- Analyst

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