Chevron (CVX) Q3 2021 Earnings Call Transcript

Chevron (CVX 1.04%)
Q3 2021 Earnings Call
Oct 29, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning. My name is Katie, and I will be your conference facilitator today. Welcome to Chevron's third quarter 2021 earnings conference call. [Operator instructions] As a reminder, this conference call is being recorded.

I will now turn the conference over to the general manager of investor relations of Chevron Corporation, Mr. Roderick Green. Please go ahead.

Roderick Green -- General Manager of Investor Relations

Thank you, Katie. Welcome to Chevron's third quarter earnings conference call. I'm Roderick Green, GM of investor relations. And on the call with me today are Mark Nelson, EVP of downstream and chemicals; and Pierre Breber, CFO; who will refer to the slides and prepared remarks 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 2. Now I'll turn it over to Pierre.

Pierre Breber -- Chief Financial Officer

Thanks, Roderick. We reported third quarter earnings of $6.1 billion or $3.19 per share. The highest reported earnings in more than 8 years. Adjusted earnings were $5.7 billion or $2.96 per share.

The quarter's results included two special items, asset sale gains of $200 million, and pension settlement costs of $81 million. A reconciliation of non-GAAP measures can be found in the appendix to this presentation. Adjusted ROCE was greater than 13%, and we have also lowered our net debt ratio to below 19%. Strong operating cash flow enabled us to deliver on our financial priorities, including the resumption of share repurchases.

Compared to before COVID, operating costs are down, upstream production is up, and we're much more capital efficient. Cost efficiency and capital efficiency are essential to navigate commodity price cycles, providing this resilience through the low periods and leveraging upside when markets are strong. This has been evident over the past several quarters, and then especially in the most recent one, as we generated company-record free cash flow, higher than the strongest quarters in 2008 and '11 when oil prices were well over $100 a barrel. Adjusted earnings -- adjusted third quarter earnings were up more than $5 billion versus last year, primarily on higher prices, margins, and volumes.

Compared with last quarter, adjusted third quarter earnings were up almost $2.5 billion. Adjusted upstream earnings increased on higher realizations and positive timing of FX, primarily related to managing LNG portfolio pricing exposure. Adjusted downstream earnings increased primarily on higher refining and marketing margins. The all other variance was positive due to some lower corporate charges and the use of deferred tax assets, which previously had a valuation allowance.

Third quarter oil equivalent production increased 7% year over year due to the Noble acquisition and lower curtailments, partly offset by price-related entitlement effects and asset sales. I'll now pass it over to Mark.

Mark Nelson -- Executive Vice President of Downstream and Chemicals

Thanks, Pierre. In downstream and chemicals, we delivered our best adjusted earnings in more than four years. Demand for our product is strong with recovery of jet fuel sales expected as international travel gradually returns. And while the improving market environment helps, we're focused on what we can control: safe and the reliable operations, capital and cost efficiency, and value chain optimization to drive higher returns.

Some examples of our self-help actions include using digital tools to improve planning, scheduling, and prioritization of maintenance activity, leveraging data analytics asset flexibility to increase margins and adopting new technologies like robotic inspections and maintenance procedures. During our Investor Day in March, I highlighted that self-help is expected to drive higher returns for downstream and chemicals. We're on track to meet that guidance with benefits already flowing then to the bottom line. Chemicals performance is also strong as CPChem responds to current market conditions while continuing to keep a focus on longer-term unit cost reduction.

GS Caltex reached 100% design capacity of its mixed-feed cracker ahead of schedule and under budget. The CPChem U.S. Gulf Coast II project continues to advance toward a final investment decision in a disciplined way that positions our project to earning attractive returns through the cycle. And the Ras Laffan Project is in FEED, and we continue to evaluate this project.

We believe in the long-term fundamentals of chemicals. Our investment focus continues to be on the low end of the supply cost curve, advantaged feedstock, competitive capital and cost structure, and become a strong project execution. Since our Energy Transition Spotlight, we closed the acquisition of an equity interest in American Natural Gas and its network of 60 CNG retail sites with our partner, Mercuria, enabling us to meet customers' needs beyond California. We're also delivering first gas through our Brightmark partnership, and all CalBioGas farms are now online.

We sold our first sustainable aviation fuel that's produced from our El Segundo refinery to Delta Airlines at LAX. And earlier this month, we announced an agreement to acquire Neste's Group III base oils business and its NEXBASE brand. Pending regulatory approval, we anticipate closing in the first quarter of 2022. The acquisition is expected to provide a capital-efficient approach to expand our base oil offerings.

And that coupled with Novvi's renewable products, position Chevron to be the supplier of choice to meet customers' needs now and into the future. Back to you, Pierre.

Pierre Breber -- Chief Financial Officer

Thanks, Mark. We recently released an updated climate change resilience report, which includes a stress test of our portfolio under IEA's Net Zero 2050 scenario, a new target called portfolio carbon intensity that includes Scope 1 and 2 and Scope 3 emissions from the use of our products, and Chevron's net zero 2050 aspiration for upstream Scope 1 and 2 emissions. I encourage everyone to also read the latest report available on our website. Now looking ahead.

In the fourth quarter, we expect lower production due to a planned turnaround in Wheatstone, which was completed last week and repairs at the Alba gas plant in Equatorial Guinea. In addition, our participation in the Rokan PSC in Indonesia ended in August. Production from Rokan averaged 84,000 barrels of oil equivalent year to date. We expect earnings from JKM-related spot sales of Australia to increase around $50 million from three quarter -- from third quarter due to some fewer spot cargoes as our long-term customers increase deliveries heading into winter.

We're also expecting three discrete cash items: a return of capital from Angola LNG, TCO's first dividend in several years, and a federal income tax cash refund. And there are no P&L impacts from these items. During 4Q, we expect to buy back shares at the high end of our guidance range. Finally, we're lowering our full year C&E guidance to $12 billion to $13 billion, primarily due to COVID-related project spend these deferrals into next year, lower non-op capex in the Permian and continued capital efficiencies.

To wrap up the quarter, we continue to make progress toward our objective of higher returns, lower carbon. And we're capital and cost efficient, generated record free cash flow and are taking actions to lower the carbon intensity of our operations and grow lower-carbon businesses. We're executing a straightforward strategy that's expected to deliver value now and well into the future. With that, I'll turn it back over to Roderick.

Roderick Green -- General Manager of Investor Relations

That concludes our prepared remarks. We're now ready to take your questions. [Operator instructions] Please open up the lines, Katie.

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question comes from Devin McDermott with Morgan Stanley.

Devin McDermott -- Morgan Stanley -- Analyst

Good morning. Congrats on the great results. So my first question, Pierre, I think, is for you. I just wanted to ask for a little bit more detail on the reduction in the capital spending guidance for this year.

It sounds like it's a mix of different factors, some of it deferrals next year, some of it's mix on non-op and efficiency gains. Can you just bridge the delta a little bit more detailed for us and also talk about whether or not these deferrals or how these deferrals impact Plan 2022 spend.

Pierre Breber -- Chief Financial Officer

Thanks, Devin. We lowered our capex guidance to $12 billion to $13 billion. That's from our budget of $14 billion and from our revised guidance that we had in the second quarter of $13 billion. So in the last quarter, what's changed? Well, we continue to see non-op spend in the Permian below our expectations.

We did have some deferred major capital projects spending tied to Hurricane Ida and the Delta variant wave, and then we've seen -- continue to see continued capital efficiency across -- in the Permian and across the portfolio. It does not change our capex guidance. Our capex guidance for next year and through 2025 is $15 billion to $17 billion. We do expect higher capex in the fourth quarter and next year.

The low end of that range is about a 20% increase from the midpoint of our revised guidance. So these deferrals are very manageable. And again I would think from the original $14 billion budget, about half you can think of deferrals and half, I would say, is capital efficiency and cost savings, where we're getting the same results at -- for less capital.

Devin McDermott -- Morgan Stanley -- Analyst

Got it. Makes a lot of sense. And then my follow-up is on cash returns. So very strong free cash flow in the quarter.

Your debt target is now below the bottom end of your target range. It's good to see the increase in the cadence of the buyback in 4Q. I guess my question is what are some of things you're looking for to further increase that buyback target back to something closer to the pre-COVID run rate.

Pierre Breber -- Chief Financial Officer

As you said, Devin, our guidance for fourth quarter is at the high end of the range. So that's a $3 billion annual rate or $750 million in the quarter. And as I said last quarter and I'll restate now, we'll increase the buyback range when Chevron's net debt ratio was comfortably below 20%. We ended three -- third quarter with a net debt ratio a little bit under 19% down from 21% at the end of the second quarter.

So we just got below 20% but we're fast approaching a net debt level where we could increase the buyback range further. As a reminder, Devin, I know you know this, we intend to mean our buyback for multiple years through the cycle. And so we're positioning our balance sheet below our midcycle range so that will enable us to continue buybacks even if the cycle turns.

Devin McDermott -- Morgan Stanley -- Analyst

Got it. Very helpful. Makes sense. Congrats again on the strong quarter.

Pierre Breber -- Chief Financial Officer

Thanks, Devin.

Operator

We'll take our next question from Neil Mehta with Goldman Sachs.

Neil Mehta -- Goldman Sachs -- Analyst

Yeah I just want to echo great results here. Pierre, I wanted to take a moment to talk about the global gas market. You spent a lot of time looking at this over the years. How do you see it playing out for the year.

There are a lot of moving pieces as it relates to your gas portfolio but one would be just any thoughts around spot cargoes and the other would be it looked like you had some timing effects in the quarter that supported earnings. I would think that would unwind later later on but just any modeling advice there. So a lot of moving pieces there but your thoughts on the gas portfolio

Thanks, Neil. First, I'd say that we are seeing high gas prices. It does feel more cyclical than structural. We've seen demand very resilient through COVID, our natural gas in particular, and supply has been impacted in part by lower associated gas, just a slowdown in some supply activity.

So seeing demand and supply a little bit out of sync is something that we've seen in the past and we expect that markets will work. We're seeing a commodity pricing right now and we expect markets to rebalance over time. We have a very strong natural gas business. We have a nice position in North America, Australia, Eastern Med through Noble Energy, and in Africa.

And so we're well positioned there. There's not much in the short term that we can really do to increase supply. We have position in the Haynesville and we could increase activity there but that will have a modest impact on a company of our size. I think over the medium to longer term, we're working expansion opportunities, and particularly in the Eastern Med.

And I think this is positive for signing up customers and enabling kind of the next phase of expansion there. So it's something that we're certainly well positioned for and we're looking to expand supply into it. In terms of the quarter, a couple of things. Yeah, we did have a trading timing effect that was related to LNG.

And that's really tied to how we manage our overall portfolio pricing. So we have customer contracts that are oil-linked and JKM-linked. And we then have various supplies and we try to match up the pricing. And in order to do that we essentially went long some JKM paper, which clearly was mark-to-market positive in the quarter.

Now that's going to be matched against some physical deliveries in future quarters so we call that timing because we expect to see that unwind when those physical cargoes are delivered. And then the last piece of guidance we had was really on fourth quarter earnings effects. We guided toward $50 million of increased earnings in 4Q versus 3Q from Australia LNG spot cargoes. And that's just to make the point that we are going to have spot cargoes.

We have all five trains operating. The Wheatstone planned turnaround is complete, and we'll have actually more cargoes delivered in fourth quarter when you think of contract and spot. But because it's heading into winter, and most of our -- many of our customers in the northern hemisphere, their nomination seasonally pick up heading into the winter and so they will have higher takes under the long-term contracts, which are oil-linked, and that means we'll have fewer cargoes getting the higher JKM prices. So higher prices clearly in JKM 4Q versus 3Q, fewer cargoes.

That's a net benefit of about $50 million. We also have some exposure out of our both Angola LNG and Equatorial Guinea. And so you can think about another $50 million or so from Scott -- spot cargoes from those operations. So sorry it's a long answer to cover the full breadth of natural gas this quarter.

No, there's a lot of moving pieces. No, that's great. Pierre, you're tracking really well on capex this year. Now, I think initially 14 then 13 now.

It looks like as low as 12. Next year, if I remember, capex is 15 to 17 is the range that you talked about. Is it fair to assume that the lower capital spend this year would suggest that you'd be on the lower end of that range? And any moving pieces that you would -- we should think about us as you set up the '22 spend level?

Pierre Breber -- Chief Financial Officer

You'll see us increase capital in the fourth quarter just to get to that $12 billion to 13 billion because we're at $8.1 billion through third quarters. And you'll see that in the Permian, two more rigs, two more completion crews. We'll have higher activity levels at Tengiz. We're going to maintain peak manpower through the winter and then activity tends to be back-loaded -- back-end loaded.

So we have some project milestone payments, we have exploration wells that we'll be drilling in the fourth quarter. So you'll see an increase in fourth quarter. I think we'll announce our 2022 budget in December like we normally do. It'll be within the guidance and I think it's fair to say it'll be toward the low end of the guidance.

Again, even being at the bottom of the guidance of $15 billion of organic capital, that's at least a 20% increase off the midpoint of the guidance we just gave for this year. So again I don't want to get ahead of that but you should expect us to see capital in the lower end of that guidance range.

Neil Mehta -- Goldman Sachs -- Analyst

Good stuff. Thanks, guys.

Operator

Thank you. We'll take our next question from Doug Leggate with Bank of America.

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

Well, thanks. Good morning, everybody. Pierre and Mark, thanks for taking my questions. Pierre, I hate to ask a housekeeping question but you've got to help me out a little bit on tax.

The way I'm thinking about this is that there's been a lot of changes in post-Noble. Your mix just changed and obviously they've got a lot more profitability in the U.S. with a lower tax rate. So can you help me.

Is what's going on the tax sustainable or is there a mix issue, or is there something unusual going on because we saw your tax rate that low. I'm worried that we're we are carrying too high a tax rate going forward.

Pierre Breber -- Chief Financial Officer

The tax benefits in the third quarter, which we've cited, are real. So this is a deferred tax asset. It was acquired through Noble. At the time of closing the transaction, we put a valuation allowance against it because these tax attributes have a -- they expire after a certain number of years.

And based on projections of financial performance at that time, we thought they would expire without us being able to use them. Our financial performance is so much stronger that we actually were able to use them in the third quarter, so that reduces our taxes both on an earnings and on a cash basis. So it's very real and it's an additional synergy from Noble and it's not something that was included in our synergy estimates. That is not something that necessarily will recur.

We'll do a review of all of our tax attributes at year end and see again what deferred tax assets could have value going forward based on a change in conditions. But again, I would cite that was in the all other segment. It's not something that you would expect to recur.

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

That's really helpful. Thanks. I don't suppose I can push you to quantify that Noble contribution was, Pierre?

Pierre Breber -- Chief Financial Officer

Well, it's the primary variance in that segment. So we talked about lower corporate charges and tax benefits.

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

All right. Got it. My follow up is really on the balance sheet issue but obviously going back five years ago, you guys didn't tally any net debt. Admittedly, there's a lot of projects going on back then.

But when you think about the cost of a debt, which is obviously very, very low and we'll see if it stays there, versus is a better versus the way you think about per share dividend goal. So I'm trying to think Exxon talks now about 20 25 percent is the right level for them. [Inaudible] your level with that kind of level, so what is the right level for you given that you can obviously finance our very own economic level and obviously step up the buybacks if you choose it.

Pierre Breber -- Chief Financial Officer

When I became CFO, we -- I answered this question that we didn't have a hard target on our net debt ratio but 20% to 25% is a good place for us to be through the cycle. And there could be times where we go above it. For example, when we showed our stress test, the only company in the industry to show a stress test last year at $30 brand for two years, to give confidence to our investors that we could maintain the dividend, our net debt ratio did go above 25%. So that's appropriate.

We do not need to be anywhere close to where we were before with no net debt but when prices are above mid-cycle, we should be below the low end of the range, and we are. We got to less than 19% now and we're fast approaching a range where we could increase our buyback guidance. So it's very close to where we're at. All the excess cash that we'll be generating under these conditions and we show that at $60 even price is well below where we're at now, that we can generate $25 billion of excess cash over five years.

This is cash in excess of our capital and our dividends. All of that cash will be returned to shareholders over time in the form of a rising dividend. And again, our dividend is up 12% since pre-COVID, the biggest increase in the sector, and a buyback that's rateable and we maintained through the cycle. We bought back shares 14 the last 18 years.

And so when we set a buyback rate, we intend to maintain it through the cycle. That means we'll maintain it when the cycle turns and which means that we can, in fact, be doing it off of debt for some time period and we'll rebalance back into the range when we continue to buy back shares if when -- if and when the cycle does turn down.

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

Let's hope that's not anytime soon because last year is -- we still got the scars from last year, Pierre. Thanks so much for your answers. I appreciate it.

Pierre Breber -- Chief Financial Officer

Thank you, Doug.

Operator

We'll take our next question from Jeanine Wai with Barclays.

Jeanine Wai -- Barclays -- Analyst

Hi. Good morning, everyone. Thanks for taking our questions.

Pierre Breber -- Chief Financial Officer

Morning.

Jeanine Wai -- Barclays -- Analyst

Good morning. We wanted to follow up on Devin's question and, I guess, Doug's question as well, getting back to the buyback. Pierre, you have already commented that you plan to maintain the buyback through multiple years through the price cycles, which is great. I think we remember a prior commentary that the goal is to not have to reduce the buyback once it started.

So we wanted to just check in on that and how you think of the trajectory of any buyback increases? It sounds more rateable versus opportunistic. We know there's a tremendous amount of free cash flow coming your way but also it seems like investor expectations are running alongside that versus being more rateable and that the strip is backwardated. So we just wanted to kind of check in on the trajectory.

Pierre Breber -- Chief Financial Officer

Thanks, Jeanine. If you look back to our history, we've never ended a buyback program at the rate that we started. We tend to increase them and I think you might be right that we haven't decreased them. Look, I'm not opposed to that we have a range.

We're using the range right. We're in the middle of the range in the third quarter -- probably the first quarter that we since we've resumed buybacks we bought back shares in the first quarter of last year pre-COVID. And now we're using the top of the range. And as I said, we're fast approaching a net debt level where we can increase that guidance range further.

So no, it's -- our focus is on being rateable and maintain it through the cycle. Investors -- our investors, our shareholders have different views on buybacks. Where we have the most common ground is do it consistently and do it through the cycle when times are good and when times are tougher. And so we're setting the rates at a level that we have confidence that we can maintain it through a commodity price cycle.

Jeanine Wai -- Barclays -- Analyst

OK. Great. Thank you for that. Our second question is really on the Permian and the outlook on capital allocation.

Can you just talk a little bit about what you're seeing on inventory and supply demand and maybe how close are you to potentially accelerating in the Permian a little bit beyond what you've already laid out. And I guess on that, we know that it doesn't get much attention but could you also be thinking about increasing activity in other short cycle plays. Thank you.

Pierre Breber -- Chief Financial Officer

We're going to increase capital in the fourth quarter and into next year and so that'll be in the Permian and I'll be in other locations. Again, as I've said, even the bottom end of our guidance range, $15 billion, represents at least a 20% increase from where we expect to end up this year. And we're seeing that in the fourth quarter. We'll see two additional rigs in Permian, two additional completion crews.

We're beginning to see a non-op pickup also again. That's part of the reason why we lowered our guidance, non-op has been a bit below our expectations, and you can see it in other basins. We have a great portfolio with a number of short cycle investments but we're not changing our overall capex guidance range. Our capex guidance anticipated that we would be in a recovery mode and it would increase over time, and we showed a five-year outlook on the Permian.

That shows that we can grow production as an outcome of a very capital efficient and also carbon-efficient developed developmental resource, that we can grow that production from 600,000 barrels a day to a million barrels a day. So we're executing our plan. There's really no change in what we're doing. It's playing out the way we expected and seeing a buildup in activity in the Permian and and across other parts of our portfolio is what we had planned to do and we're going to do that in a very capital and cost-efficient way.

Jeanine Wai -- Barclays -- Analyst

Great. Thank you.

Operator

We'll take our next question from Philip Gresh with JPMorgan.

Philip Gresh -- J.P. Morgan -- Analyst

Hey, Pierre. First question here. Just kind of circling around the capital-light issue based a little bit more, back in March you talk about having $25 billion of excess cash or greater than $25 billion in excess cash over five years at 60, implicitly suggesting the dividend would be covered around 50-ish Brent, I believe. I'm just curious if as you've progressed through this year, the performance that you've seen, etc., has anything changed with that to make you think that that breakeven would be moving lower or is that still an area where you're comfortable with? That's an area where we're comfortable with.

It's just keeping oil prices constant, right? We're seeing Mark Nelson, downstream and chemicals group, perform very well. We've talked about natural gas pricing being strong both in North America, Europe, and international LNG. So those things aren't held constant, so if you look at this quarter's results I think you'd see our break even would be a little bit lower. But in terms of midcycle assumptions for refining margins, chemical margins, natural gas prices, and then an oil break given about 50 is certainly where we're at.

Now that, of course, that changes as our dividend goes up and in other things over time because of the dividend break even. It's covering our capital and our dividend but that math is still intact. We are a better company than we were few years ago. We showed that chart where costs are lower, our production is higher, and we're much more capital efficient we can sustain and grow this enterprise with less capital and that helps us deliver higher returns and lower carbon.

Phil Gresh

Got it. OK. And then just a follow question on Wheatstone. There were some reports from your partners about reserves being written down there.

I just want to get your commentary. How do you think about this? Does that does that mean something in terms of future capital requirements, given that it's a longer cycle project. Any commentary out there? Thanks is.

Pierre Breber -- Chief Financial Officer

It's unrelated to Chevron. So if you recall, the Wheatstone project was the first project in Australia and maybe the world where there were third party -- the reserves -- the resources came from two different joint ventures. And so it was Apache at the time and now it's Woodside. So it was really Woodside announcing that the fields that supply their portion of -- that told through Wheatstone that those reserves have a writedown.

Chevron does not have an interest in those reserves, so the fields -- the Chevron fields that supply Wheatstone are not affected. And again, it's unrelated to Chevron activity. It's only that they -- essentially, we share the facility through them and those fields are also being processed through. Wheatstone is doing very well.

We had a planned turnaround that covered a portion of third quarter and early into fourth quarter, as I said, it was completed last week and we expect to have all five of our Australia trains operating this quarter. And as I said, we expect more cargoes. There's a lot of focus on JKM but, of course, our oil-linked contract prices will also be higher because they adjust with oil prices are higher and then they adjust with oil prices on a three- to six-month lag.

Phil Gresh

Great. Thanks for the clarification then.

Pierre Breber -- Chief Financial Officer

Thanks, Phil.

Operator

We'll take our next question from Ryan Todd with Piper Sandler

Ryan Todd -- Piper Sandler -- Analyst

Great. Thanks. Maybe a high level question and you did your energy transition spotlight. And then a little while back, you said you know a share of the capital budget that close to local businesses being close to 10% of the capital budget, you've seen one of your peers here in the U.S.

raise theirs to a similar level. As you think about the feedback that you've received since then -- I mean our view was that it was a pragmatic balance between allocation of capital toward good low carbon businesses but not too much to kind of protect return dilution going forward. Is 10% of the budget, you've seen feedback over the last couple months, give you that 10 percent of the budget is enough or do you think that's going to be something where you're going to see increasing pressure to to kind of creep that higher going forward?

Pierre Breber -- Chief Financial Officer

I'll start and then I'll ask Mark to talk a little bit about some of our renewable fuels activities in his portfolio. We have good shareholder support in alignment for our strategy and objectives of higher returns lower carbon. That's both lowering the carbon intensity of our traditional operations and then growing low-carbon businesses that leverage our strengths our capabilities assets and customer relationships. And they target the sectors that cannot be easily electrify, the hard to abate sector.

So this is things like air travel, industrial emissions, heavy duty transport. The $10 billion of capital is connected to some pretty ambitious targets that go out to 2030. So it's 150,000 tons per annum of hydrogen, 25 million tons per year of carbon capture and storage. That's all consistent with that capital guidance.

So we are more in the execution mode and getting it done versus, let's say, competing on capex targets. It's not easy to do. These are ambitious targets. They have challenges, lots of opportunity.

But let me ask Mark to talk a bit about his portion of that on renewable fuels.

Mark Nelson -- Executive Vice President of Downstream and Chemicals

Thanks for the question, Ryan. I could use a real tangible example. You think about our El Segundo refinery in our diesel hydro treat or conversion. We've said a few things are really important to us when it comes to renewable diesel.

We've said that the ability to sell it at the appropriate margin, the ability to have the right kind of feedstocks, and the ability to be capital efficient is critical for us to be successful. And Southern California and the El Segundo refinery are an example of all of that. We've already increased our sales -- we're getting close to 40%. Let's say, over 30% of renewable and biodiesel in Southern California.

We have our our Bunge joint venture, where we're working toward definitive agreements, as we speak, and yet they're already supplying us at the El Segundo refinery. And finally, and perhaps most importantly, capital efficiency. We indicated in our energy transition spotlight that we expect to be a leader in the capital capital conversion of particular hydro processing units in our system and we believe we can do that for less than a dollar per gallon of annual capacity. That's including any pre-treatment requirements.

So that gives us the ability to produce both renewable diesel and conventional diesel just with a catalyst change, if that's necessary. So when you and you step back and you think about that work that's been done initially at El Segundo where we did our co-processing investment for very very little money we were able to test tanking and piping and metallurgy needs. And now we're working toward a full conversion of that diesel hydro trigger here by the end of next year. That won't be easy but the team is working really hard on it making very good progress and that would be 100% renewable diesel capacity in over 10,000 barrels a day.

Thanks for the question, Ryan.

Ryan Todd -- Piper Sandler -- Analyst

Thanks, Mark. Maybe a follow up on some of your comments earlier, Pierre, where you mentioned -- when you're talking about gas market and you mentioned the Eastern Med opportunities. We haven't talked about that much in a little while. In your conversations with potential buyers of that gas in the basin, I mean in the past when it was operated by Noble, it was -- there was talk of everything between European targets to pipelines to Egypt to floating LNG and all those sorts of opportunities.

Any thoughts on what may look like it makes the most sense there in the Eastern Med and opportunities for whether it's shorter term debottlenecking and an opportunity there versus longer term project development?

Pierre Breber -- Chief Financial Officer

All options are still on the table, Ryan, and it's commercially sensitive so I don't want to show our hand in any way. I mean the point is that this is a great resource. There's some very low cost expansions that can be done into some larger expansions that can be done over time. What's really changed is that was in a geography that a year ago looked oversupplied for natural gas and now looks much tighter.

And so, as you know, the natural gas business internationally is really dependent on getting customers to sign up. And I think customers are more motivated now. And look, it's probably overdone. As I said earlier, we expect the markets to correct but it is a better time for us to be engaging.

So it's a great resource, in many cases, as backing out coal. It has expansion opportunities. It's been free cash flow positive from the moment that we closed Noble, so it's just a great asset and it's well positioned now to have opportunities to grow in the future.

Ryan Todd -- Piper Sandler -- Analyst

OK. Thank you.

Operator

We'll take our next question from Paul Sankey with Sankey Research.

Paul Sankey -- Sankey Research -- Analyst

Hi everyone. Pierre, if I could start with you. Would it be possible to try and normalize your exposure to LNG, given that there's so many moving parts over the course of the past year or so. I'm just noting that you said during your comments that your spot exposure will be somewhat different in Q4 as a result of customers pulling long-term contracts.

If we could just take take it apart a bit and sort of normalized into 2022 2023, where are your volumes and how much of that is going to be long-term versus spot, if you could have a go at that. Thanks.

Pierre Breber -- Chief Financial Officer

Paul. We'll cover that more in our fourth quarter call when we give full-year guidance on a number of items. We have a long-term contract that will begin next year, so we'll take our waiting too long-term contracts a little bit higher. Again we've been notionally around 80% but that's something -- that's why we very consciously just provided guidance for this quarter as it will change a little bit next year but we'll do that on the fourth quarter call.

Paul Sankey -- Sankey Research -- Analyst

OK. If I -- I'll move on some more. But if I could just slip a quick one a few in regards to modeling do I assume that we put everything into buyback in terms of free cash flow or are there any other items that you would highlight maybe pension or something that we should just be aware of going into 2022 and how much we consider your buyback to be? Thanks.

Pierre Breber -- Chief Financial Officer

Over time, the vast majority of the excess cash will be returned to shareholders in the form of higher dividends and the buyback. We did a one-time pension supplement last quarter. It was really tied to the very low interest rates from a year ago. It sounds like a long time ago but under the Pension Benefit Guaranty Corporation rules, the funding requirement is fixed by -- on the year-end interest rates.

And so we were a little bit underfunded, and therefore, would have paid a little higher was called a variable interest rate essentially higher than our cost of borrowing and so that's why we supplemented it. Obviously, we're in a much different place in terms of interest rates now and you'd expect our pension contributions to be as they have been and we provide guidance on pension in our 10-Q filings, so you would not expect anything on that end. So again, if you go to our financial priorities, Paul, you know them well, sustain and grow the dividend. It's up 12% since pre-COVID, the biggest increase in the sector.

Our capital guidance is going to be up but it's no change from the guidance range and it's in a very tight guidance range and very capital efficient and lower where it was pre-COVID. We're going to pay down a little more debt. As I said, we're fast approaching a level where we can increase our buyback range. And so then the balance is excess cash.

And over time, it goes to shareholders. We're not going to swoop it out each quarter because investors are very clear that they want us to maintain a buyback through the cycle.

Paul Sankey -- Sankey Research -- Analyst

I guess that would mean no specials?

Pierre Breber -- Chief Financial Officer

I think it's time for you to ask the question to Mark.

Paul Sankey -- Sankey Research -- Analyst

Mark -- well, thanks. Thanks, Pierre. Mark, a very general question but could you talk about how capacity is changing downstream both in refining and chemicals? Because I know we're adding a lot of chemicals obviously we're also shutting down a lot of downstream. Has -- firstly, is there any way that Chevron's dramatically changing its capacity and exposure downstream? And secondly, can you talk about that in the context of ways the U.S.

and global capacity -- I know this could take two hours and I apologize, but if you could generally say you know how our global capacity has shifted? And the more numbers you could give us, the better. Thanks.

Mark Nelson -- Executive Vice President of Downstream and Chemicals

Yeah. Thanks, Paul. So let's start with the refining side of the business. We -- use margin as the proxy for capacity being utilized.

We've said demand has to recover for high value products. Inventory has to fall in the traditional ranges and then we need some degree of refinery rationalization either closures or conversions throughout the system. If you're in the U.S. today, I think you're seeing much of that demand recovery with the jet still to come and that's even with the officers not not completely open, and so some restrictions in place.

Inventory tending to find itself in traditional boundaries and starting to see some closures and or conversions in some of our markets, especially the U.S. West Coast, which means the market could be could actually be tight on things like motor gasoline even jet five or six years from now. So you see that in the United States. If I shift to Asia, I would say that demand recovery on jet is a little bit behind that of the U.S., especially given our exposure to Southeast Asia inventory reduction falling into those ranges is starting to happen some of that with you know with China stopping some of its exports for the moment but demand catching up with refinery capacity in Asia is still needs to happen.

And that means that you we both need some perhaps some rationalization as well as demand just to catch up with the capacity that's there. And so might my high level comment would be that in the United States we're seeing the actions to bring refinery margins into balance over time, getting closer to historic ranges in just a half days behind that maybe in Asia. And then for the pet chem side of the equation, pet chem margins have had a strong run this year on the back a good demand and considerable supply disruptions. We would expect to see margins come off as we get to the fourth quarter normal seasonal type of dropoff but we're actually preparing for -- with capacity growth over the next few years, we expect that to outpace demand.

So with that part of the cycle and even in 2025, we're presuming we'll be on the lower portion of the margin cycle. So that means that there'll be a period of of catchup there in regard to demand catching capacity. I hope I got to your issues.

Paul Sankey -- Sankey Research -- Analyst

You did. Thanks, Mark. And just from a Chevron point of view, is there any major changes in your capacity over the next five years that you anticipate refining and chemicals? Thanks.

Mark Nelson -- Executive Vice President of Downstream and Chemicals

Other than the comments we've made about -- you remember it was about a decade ago that we did much of our, what I'll call, rationalization meaning taking things out of our portfolio and we've highlighted our energy transition spotlight that we had this opportunity for this very capital-efficient conversion of into bid individual hydro processing units. And we will certainly do that over the next decade to get to that hundred thousand barrels a day of RDSAF capacity.

Pierre Breber -- Chief Financial Officer

Thanks, Paul. We're going to have to go to the next.

Mark Nelson -- Executive Vice President of Downstream and Chemicals

Thanks, Paul.

Operator

We'll go next to Roger Read with Wells Fargo.

Roger Read -- Wells Fargo Securities -- Analyst

Hey, thank you and good morning. Pierre, I'm going to hit you on capital returns, buybacks, and balance sheet. No, I'm just kidding. Mark, I would like to ask you about the group oil-based III acquisition, kind of how that fits in the overall structure and what we should think about there, and whether or not we've seen some stories about renewable feedstock for Group 3, maybe how you see that working out over time.

Mark Nelson -- Executive Vice President of Downstream and Chemicals

Yeah. Thanks. As mentioned in the prepared remarks, we're excited about the announced acquisition of Neste's Group III base oil business and in the NEXBASE brand. And the reason for that is it's a very capital-efficient acquisition of both offtake of supply, appropriate qualifications, and the brand -- NEXBASE brand itself.

And what that does for us is it allows us to expand our offering. So we're going to add that to our existing Group 2, 2-plus and over Novvi offering to have a complete offering for the base oil needs for our customers in the future in. And think about that the Novvi brand that we've talked about I think in the energy transition spotlight we shared that Walmart would be selling online. Our Havoline PRO-RS, the first renewable lubricant line.

And we've actually brought some of that forward, and starting next Monday, we will have our installed base in North America, specifically the United States and Canada in particular, running a whole line of Havoline PRO-RS. So we're creating that demand for the renewable portion of that offering and it really gives us something where we can be that supplier of the future for our base oil customers. Thanks for the question, Roger.

Roger Read -- Wells Fargo Securities -- Analyst

Yeah, absolutely. And then if we could come back to some of the things on the capex. You've referenced delays out of the Gulf of Mexico due to the storms, which totally makes sense. As you look at the development and some of the exploration, I think you're looking to do out there, over the next couple of years, is there any change to that or any sort of change in the order of projects we should pay attention to?

Pierre Breber -- Chief Financial Officer

No, we have a steady stream of projects really with Anchor that has been under way a whale that recently went to a final investment decision and Balmoral, which is coming along. So you'll see a very rateable development program. Gulf Mexico is a high return, low-carbon assets, some of the lowest carbon intensity barrels in our portfolio in the single digits and is a business that we've been invested in for decades have know-how and some competitive advantages and can find attractive investment opportunities. So it's sort of a modestly growing part of the portfolio.

If you think of the biggest growth that we have going forward, clearly is in the Permian, which I referred to earlier, Tengiz is a project that we're investing in and it's project is going very well and the project will come on in a couple years. But when you get to Gulf of Mexico the Rockies or Colorado a few other places are also have very attractive investment opportunities that can deliver both higher returns and lower carbon.

Roger Read -- Wells Fargo Securities -- Analyst

Thank you.

Operator

We'll take our next question from Biraj Borkhataria with RBC.

Biraj Borkhataria -- RBC Capital Markets -- Analyst

Hi. Thanks for taking my questions. Two questions. The first one was just thinking about the balance sheet, because of your conservatism the way you manage your balance sheet you've been able to make some countercyclical moves and Noble was obviously the most recent one.

Given we're at the high point of the cycle now, can you talk about any plans to accelerate asset sales?  I know it's not needed for the balance sheet but it's interesting to hear whether you think there are any opportunities out there and if so are they're upstream, downstream or chemicals? And then the second question is on Tengiz. It's good to see that the dividend come through after a number of years. And there any loan repayments due in 2022? And then finally just a quick comment to say thanks for the PCI calculation tool, which you published. It's actually quite difficult to dig into some of these figures and understand all the variances, so appreciate the transparency there.

Pierre Breber -- Chief Financial Officer

Well, thank you, Biraj, for recognizing PCI. Our teams will be very happy to hear that. We wanted to make a tool that was transparent where you could use it for other companies because I know comparability is of interest to investors and so it's based on again transparent reporting data and comparability and so thank you for taking advantage of that. I encourage others to check it out.

Let me just talk about TCO because as we look back, we had a very successful spring and summer campaign there. We hit our productivity targets and we achieved a lot of our milestones when we had a full workforce. So we had a Delta variant wave, which caused some higher levels of isolation in the middle of the third quarter, but we ended the quarter with our positive rates very, very low and we're back to our full workforce. And as I mentioned earlier we intend to maintain a peak manpower workforce level through the winter months.

We have a vaccination rate over 85% for that workforce, so we're well positioned to make a lot of progress this winter. Now we have to be thoughtful about it because it can get cold there. So we're sequencing the work in a way that we're saving a work that can be done indoors or in sheltered locations during the coldest months of the winter. So no change clearly in the guidance that we provided on second quarter in terms of budget and schedule but I wanted to give an update.

Things are going very well in Tengiz and we're looking forward to a very productive winter season there. In terms of the dividend, you're right it's the first dividend in three years so that's nice to see. We did have a modest loan repaid back that occurred last quarter. And look, we'll give guidance on 2022 just like with Paul's question when we look forward.

It will depend clearly also on oil prices but that's something that we'll give guidance on our 4Q call. In terms of asset sales, yes, we acquired Noble when or announced the acquisition when Brent was in the low 40s. And now Brent is in the low 80s and so it's a commodity business it has cycles, ups and downs. And when you buy or sell assets timing makes a difference where you are in the cycle and of course strategic fit and all the elements we're very pleased with the noble transaction we talked about the timing of it the first to do it the synergies that were doubled and the tax benefits that we saw this quarter and an interest cost savings so we did tender a number of bond offerings earlier this month.

A lot of those bonds are Noble bonds. Again that was not included in our synergies because we weren't quite sure we could achieve that and we'll save over $100 million in interest cost savings. So Noble just keeps contributing to the company, and that's part of the reason why we're a better company now than we were several years ago. But it's a different market, so yeah I view it more as a seller's market than a buyer's market right now.

And so you're seeing us modestly increase some assets that don't compete for capital as well in our portfolio. In fact, one of them is our position in the Eagle Ford. So that was a Noble legacy position. Chevron legacy was not in it, so we don't have quite the scale that we would like.

But again, essentially buying that position at forty dollars and now we have it on the market that's in the public domain and obviously we expect to get much higher value than -- for what was implied in the purchase price. We have some other U.S. onshore assets that are on the market again that we feel are very attractive to a lot of industry players. We just won't compete for capital as well in our portfolio.

Thanks, Biraj.

Biraj Borkhataria -- RBC Capital Markets -- Analyst

OK. Understood. Thank you.

Operator

We'll take our next question from Paul Cheng with Scotiabank.

Paul Cheng -- Scotiabank -- Analyst

Hey, guys. Good morning. Two questions, please. So the first one just for Mark.

Mark, you guys did the Pasadena refinery and at that time you said that it's one-off because you have payment on the refinery. There's a lot -- quite a lot refinery rateable for sale in here. so we want to see with the substance on the lot the refining capacity being shut, does it change the way that how you're looking at that business or that you think you already have sufficient not their capacity and supplementary and you really don't need to add? And also  in the retail marketing, some of your peers that have been aggressively at that building that up and including in the U.S. and you guys have a lot that business for more than 10 years, and is there any plan to going back so that on their energy transition, including in the [Inaudible]? The second question is for Pierre.

You talk about, say, the TCO dividend, how about the Angola LNG? Can you give us some idea that if the current commodity price [Inaudible]. Should we assume every year that both Angola LNG and the TCO is going to pay the dividend? And any kind of sensitivity you can provide that if the change in the oil price how that impact on that dividend payout going to look like?

Mark Nelson -- Executive Vice President of Downstream and Chemicals

All right. Paul, thank you for the questions. I'll take them, I guess, in reverse order. I think your second question was really about retail marketing.

And as you know, we have three world-class brands. And we've taken a capital light approach to selling our branded fuels. In fact, one of the metrics that we often look at is the Opus brand power rating and we continue to be well at the top of that list. And what that means is the majority of our retail sites around the world that you would see are owned by retailers who have specifically chosen our brand.

And so we have our brand, our fuel, and generally not our capital. We also happen to have one of the strongest retail convenience franchising offerings out there, Extra Mile, that you've probably seen. In fact, I think we hit our 1,000th site this year with very, very little attrition. And so we believe that our limited capital approach provides us the majority of the margin in sustainably delivered high returns and still allows us to stay connected with customers and invest part of that offering to customers to have EV charging stations in seven countries around the world.

And we're partnering with our retailers to continue to expand that offering as customers actually need it. Your second question was I think about the refinery portfolio in general and maybe Pasadena specifically. We're very pleased with our refining portfolio today and it's really because of that hydro processing capacity that we have across our system it gives us flexibility to deal with the fuels of the future and renewable fuels in particular in a very very capital efficient way. Specific to Pasadena, again we have an opportunity there.

The premise of the acquisition continues to hold for us in processing our equity crude, being able to supply our own service stations in the Texas Louisiana area, and then of course having the intermediates back and forth between Pascagoula and Pasadena. That's all working as we would expect and we've shared that we think there's an opportunity there to have very efficient expansion of light tight oil processing capacity. And we've hinted that that's going to be a hydro skimming focus. We're working on that real hard and look forward to talking more about that next year.

Thanks for your question, Paul. Pierre?

Pierre Breber -- Chief Financial Officer

Yeah. And on Angola LNG, so it's in our Looking Ahead slide, Paul, we guide toward $300 million of return of capital. It's essentially a dividend it's just kind of an accounting characterization of it as return to capital. It's cash is the bottom line.

And in terms of guidance going forward just let's just say Angola LNG does sell into the spot market essentially both on oil linked strips and into Europe ETF or international JKM markets, so it does have exposure to international natural gas pricing. $300 million will be a nice return of capital here in the fourth quarter. And again, just like with Paul Sankey's question, we'll provide guidance for our full LNG portfolio on the fourth quarter call for 2022. That'll include Australia, Angola LNG, and our interest in Equatorial Guinea, which again is another asset that was acquired through Noble Energy.

Thanks, Paul.

Operator

We'll take our next question from Manav Gupta with Credit Suisse.

Manav Gupta -- Credit Suisse -- Analyst

Hey, guys. Two questions I'll ask them upfront. The first one is I'd like to pick your brain on the midcycle chemical margins here. Historically we thought the midcycle would be more like $0.25.

Obviously right now you are more like $0.65 and even though you did say you know the margins will decline, some of the bigger chemical ethylene players are out there saying we will settle for the next two, three years above the midcycle level. So while the midcycle could be $0.25, you could still see $0.35 to $0.40, so that's the first question. And the second question is you're seeing you get into the CNG distribution for the first time and I'm wondering if this is associated with your strategy of developing RNG and basically controlling the entire value chain, so you can distribute your RNG that you're pretty going to produce to your distribution network.

Mark Nelson -- Executive Vice President of Downstream and Chemicals

Thanks, Manav. Got your questions. So first on petrochemical margins, we indicated as we look to the longest of terms we expect him demand to continue to grow in line with the long term GDP growth. We believe again in kind of the next four to five years, we do see capacity growth in the next couple of years going past demand, which brings us to toward the bottom portion of the margin cycle.

And so I think we shared in our Investor Day discussions last year that we brought our view down and it's again erring on the side of of conservative and perhaps but that it was going to be $0.20 per pound in regard to where we could expect those margins over time. Anything above that of course we will take, and it drives us in our CPChem joint venture to make sure that we continue to work on our unit cost reductions, which they have done a very good job on and we'll continue to do going forward. And so we see that that is our number looking forward. And then when I get to your comment on the RNG portfolio, you read it exactly correctly.

Our close on the 60 American natural gas sites is really about us leveraging our strengths. When we talk about renewable natural gas, we say a couple of things we say it leverages our strengths in bio feedstocks are really important. The strengths in particular are value chain, activities, and partnerships. And the two areas where you can see this at play actually in the formal presentation would be in the gas that's now coming from CalBio from all of the farms that we have there and then our Brightmark activity experiencing their first delivered gas.

On the 60 CNG sites that American natural gas CNG sites with Mercuria, that allows us to follow the request of our customers, if you will. We were trying to get CNG to those customers throughout our portfolio and that's a first step in doing it in the platform for us to grow.

Manav Gupta -- Credit Suisse -- Analyst

Thank you.

Pierre Breber -- Chief Financial Officer

Thanks, Manav.

Operator

Thank you. Our last question will come from Jason Gabelman with Cowen.

Jason Gabelman -- Cowen and Company -- Analyst

Yeah, thanks for squeezing me in. I may have missed it but can you just discuss the drivers of why TCO is declaring this dividend now and kind of what we should look to assess if they'll declare it next year? And just some background on how we could calculate that. And then my second question just on cost inflation what you're seeing across your projects, if it's impacting TCO at all or any of your either large or sorry long cycle projects or short cycle in the Permian. Thanks.

Pierre Breber -- Chief Financial Officer

Thanks, Jason. Yeah, I should have mentioned. No, TCO is paying a dividend. It was in the plan but it could be higher than was planned, which is why we've guided to a range of primarily because two things: one, clearly the macro environment is stronger, so it is -- it produces a light oil that attracts trade so a tight discount to Brent and with the fiscal terms and the rest of it it's generating excess cash and also we've seen at at the projects some real cost savings.

Again we've seen some deferrals but that would be factored into retaining cash in TCO but we've seen some underlying greater efficiencies and we've seen some foreign exchange benefits there. So it's a function of things going well both from a market environment and from an execution of the project. Again in terms of '22 -- 2022, we will provide guidance. On the fourth quarter call, like we have in prior years, we've guided historically to that cash flow line, which is the difference between dividends and affiliate earnings, I think we also might just give separately arranged on expected dividends from Tengiz and other major affiliates.

And then in terms of cost, we're not really seeing any cost increases. Rigs, U.S. onshore rigs are maybe creeping up but they're still well below where they were pre-COVID, and then in general, the industry is operating below capacity. So although there are pockets of goods and services that we use that are tied to the general economy like steel and clearly steel is up but the majority of our costs are tied to industry specific major equipment and that's still operating below capacity.

So it could increase in the future. I know there's a lot of talk of there about it but what we're seeing up to date is costs are well under control.

Jason Gabelman -- Cowen and Company -- Analyst

Thanks.

Roderick Green -- General Manager of Investor Relations

I would like to thank everyone for your time today. We appreciate your interest in Chevron and everyone's participation on today's call. Please stay safe and healthy. Katie, back to you.

Operator

[Operator signoff]

Duration: 62 minutes

Call participants:

Roderick Green -- General Manager of Investor Relations

Pierre Breber -- Chief Financial Officer

Mark Nelson -- Executive Vice President of Downstream and Chemicals

Devin McDermott -- Morgan Stanley -- Analyst

Pierre Breber -- Chief Financial Officer

Neil Mehta -- Goldman Sachs -- Analyst

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

Jeanine Wai -- Barclays -- Analyst

Philip Gresh -- J.P. Morgan -- Analyst

Phil Gresh

Ryan Todd -- Piper Sandler -- Analyst

Paul Sankey -- Sankey Research -- Analyst

Roger Read -- Wells Fargo Securities -- Analyst

Biraj Borkhataria -- RBC Capital Markets -- Analyst

Paul Cheng -- Scotiabank -- Analyst

Manav Gupta -- Credit Suisse -- Analyst

Jason Gabelman -- Cowen and Company -- Analyst

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