Chevron Earnings Call Insights: Unconventional Rigs and Cash Pile
Evan Calio – Morgan Stanley: John, I believe you guys hold over 950,000 acres in the Delaware Basin inclusive of last year’s asset acquisition and larger position in the Permian in total marking Chevron one of the larger acreage holders yet running fewer rigs than some of the peers. So, I mean, how many unconventional rigs are you running and maybe can you discuss planned activity ramp in ’13 and whether or not there’s any internal constraints for you, whether you’re limited at all on the people side to accelerating this (NYSE:NAV) realization? I have a second question please.
John S. Watson – Chairman and CEO: Well, we are ramping up rig activity. In fact, we’re just looking at some of the material we are going to show you for the SAM meeting that’s coming up and we will give you actually some pretty good rig count data and what you will see is, we are ramping up rapidly in the Delaware Basin. As you would expect, we’ve got really over 20 in the Permian region that are running right now. We will give you more specifics about the ramp up is headed there. Activity in a fewer number of rigs are running up in the Marcellus region, but that too has been gradually ramping up as we – as you know, we are still drilling gas prospects there as we have the carry that we are working through. I will be happy to give you a lot more detail on that with precision on the number of rigs. We are seeing volume growth in both of these areas that are a part of the plan going forward. You had a follow-up?
Evan Calio – Morgan Stanley: Yeah. I just was curious within that if you saw any internal constraints, meaning you’re able to organically to ramp those volumes?
John S. Watson – Chairman and CEO: Well, we are. Having said that, I think the industry is very focused on building organizational capability, and we’ve added a significant number of new people and added to our drilling training programs that we have in place both in the United States and overseas. And so, organizational capability; we’re not going to operate if we don’t have people that we think are trained and capable and I think there are pressures on the industry, but when we plan to ramp-up, we only plan to ramp-up if we have the right people.
Evan Calio – Morgan Stanley: My second question was, John, I know it’s one of your favorite topics as well as Pat, is the Ecuador litigation. I know still there’s been some positive movement there in the most recent quarter. We’ve read the judge directly implicating himself for improper conduct as well as plaintiff. But also, your legal involvement is spreading across the globe now in Argentina and Brazil, and of course, as well as U.S. and Canada and The Hague. So, I was wondering if you could just provide any roadmap for activity in 2013 in these various theaters of operation and when the RICO case is set to commence, and I’ll leave it there.
John S. Watson – Chairman and CEO: Sure, that’s a broad question; I’ll try to do it succinctly. First, your premises is correct. We continue to uncover evidence of quite profound fraud in the case, and you mentioned that a judge that was actually involved in ghostwriting the opinions based on bribes he was receiving from the plaintiff’s lawyers has come forward, and given a statement in U.S. courts and has provided corroborating physical evidence to support his allegations that he ghostwrote the opinion for the plaintiff’s lawyers. So, you now have a circumstance where we have through videos, through sworn testimony, through emails and other means; clear evidence that the plaintiff’s lawyers have thoroughly corrupted the judicial process in Ecuador and this is an invalid opinion. I think that’s pretty well known by you and others out there. I think the question is, how do you bring this thing to an end. I would say that we’re moving forward in several areas. The RICO case, the wheels of justice move at a certain pace. We’ve been moving our RICO case forward. We’ll go trial in New York in October of this year. We’re actively in the courts, in The Hague and we expect there are series of rulings that will take place over time, but there are – we’ve won virtually every procedural ruling there and expect that we will see – there have already been some judgments that have been put out indicating, for example, that the Government of Ecuador should not do – they should do everything in their power to prevent this false judgment from being enforced, which of course, they’ve ignored. So, we do expect that there will be possible rulings out of that panel as well. But there are multiple stages to that, to those cases. We’ve had multiple discovery proceedings in the U.S. The area that you’re probably interest in is the – we believe it’s an illegal verdict, but the plaintiff’s lawyers are taking it and trying to use that judgment for recoveries in other countries. Our view has been that any country that honors rule of law will not uphold this verdict and in fact, will throw it out. Having said that, we have to defend ourselves. So, we’re doing it in Canada, Argentina and Brazil. You should know that these cases take time. There are number of procedural steps that take place. So, first, there are jurisdictional issues that are worked and it takes a while, if you ever get through those hoops, to get to the merits and our view is that when there has been a fraud committed by the court that no government with the functioning judiciary is going to hold this. And the countries where these enforcement actions have been filed, we think ultimately will support rule of law, but we have to fight it every step of the way and I can’t put a timeline on that. What I can tell you is, we are not going to reward people that have committed crimes against us.
Paul Sankey – Deutsche Bank: Again, on cash pile, I am still (duplexed) by why it’s so large subsequent to the Gorgon CapEx announcement. John and Pat, could you just remind us again why we are holding so much cash in the balance sheet in this interest rate environment?
John S. Watson – Chairman and CEO: Sure, Paul. We’ve talked about the priorities for our cash, and for the benefit of everyone on the line, I will just repeat them. Our uses of cash are geared toward paying and sustaining and growing the dividend. Funding the capital programs that are required to make earnings in cash flow grow, keeping some capacity on the balance sheet for the ups and downs in the commodity markets and changes that can take place in the business and finally, returning cash to shareholders through repurchases and that’s been our strategy for a long, long time. You are correct. We have more cash than debt on our balance sheet. But I think if you look at our capital program that we have announced this year where the cash portion of the C&E is about $33 billion, if you look at cash that we generated this year and you can use your own estimate of what commodity prices and margins are going to be, it would be pretty easy to add at the current rate of dividend and repurchases some $12 billion in distributions and see that our net cash balances will come down this year based a reasonable forecast. I will tell you that between now and end of 2014, you should see our net cash less debt, the net number that we talk about, will come down over time. I don’t know exactly what commodity prices will be during that period, but it will come down through a combination of significant capital spending which we have underway this year and next; dividends and repurchases that we’ll size to get our balance sheet back down to something with a little more net debt on the balance sheet than we’ve had previously. We have had a conservative balance sheet. Prices have been a little bit higher than we’ve expected. But we know that there are uncertainties out there, and we think that’s the best way to run our balances at this point.
Paul Sankey – Deutsche Bank: John, you’ve said you’re relatively bullish on oil prices and you like the shape of your portfolio. There is a U.S. oil revolution underway and you do seem relatively underweight in that area which is absolutely your own backyard. What’s your appetite to step up your exposure to U.S. oil?
John S. Watson – Chairman and CEO: Sure. Well, we are investing in a big way in the United States; of course, offshore with our developments at Jack/St. Malo and Big Foot and the exploration program that we have in the Gulf of Mexico. I think you’re probably referring to some of the onshore activity. And again, we’ve had a longstanding position in California that produces oil; we’ve had a mature business and a lot of acreage in West Texas. And then we’ve recently added to that with the acquisition where we picked up some acreage in New Mexico from Chesapeake. Our unconventional production; we told you last year, there are unconventional production around the world; we’re 175,000 barrels a day by 2017, that it was – a not insignificant portion of the increase in our production between now and 2017 would be in the unconventional area and a lot of that’s in the United States. And I think what you’ll see when we come back for the SAM presentation in a month or so, is that number will be higher, and it will be a function of the ramp-up of activity in the Permian area as well as some successes that we expect to see in the Marcellus and in the Utica. So, I’ll tell you, we tend to be returns-focused when we make investments. I’ll tell you, right now, a lot of what we see, a lot of transactions come across our desks, but we take on opportunities where we think on a full cycle basis, including the acquisition costs, we can generate solid returns. Right now, there are assets that are selling that we think are very pricey. Now, we feel very good about the acquisition of acreage from Chesapeake. That was a complex transaction. We think we negotiated a good deal there. We feel particularly good, although it’s not oil – we feel particularly good about the transaction in Canada. It’s an enormous resource that we picked up that ultimately will produce LNG for export that will at oil-linked pricing. So, we feel pretty good about the way we’ve added to our portfolio given all the opportunities that we have around the world.
Paul Sankey – Deutsche Bank: Conceptually, would you prefer the Bakken or the Permian?
John S. Watson – Chairman and CEO: I prefer an area where we can make a good return being very honest. We don’t have a position in the Bakken. I think I’ve said before that if I could wind back the clock and see that well, it’d be nice to have a position, but it’s very pricey right now. To just pour a bunch of capital in there and enter that fray, I don’t know that we could make full cycle economics look very good.
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