Chevron Corporation (NYSE:CVX) Q1 2020 Results Conference Call May 1, 2020 11:00 AM ET
Company Participants
Wayne Borduin - General Manager, Investor Relations
Michael Wirth - Chairman and Chief Executive Officer
Pierre Breber - Vice President and Chief Financial Officer
Conference Call Participants
Devin McDermott - Morgan Stanley
Neil Mehta - Goldman Sachs
Jeanine Wai - Barclays
Paul Cheng - Scotiabank
Paul Sankey - Mizuho Securities
Pavel Molchanov - Raymond James
Doug Terreson - Evercore ISI
Biraj Borkhataria - RBC Capital Markets
Sam Margolin - Wolfe Research
Brian Todd - Siemens Energy
Operator
Good morning. My name is Jonathan and I will be your conference facilitator today. Welcome to Chevron’s First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded.
I wound now turn the conference call over to your host for today’s program, the General Manager of Investor Relations of Chevron Corporation, Mr. Wayne Borduin. Please go ahead.
Wayne Borduin
Thank you, Jonathan. Welcome to Chevron’s first quarter earnings conference call and webcast. Our Chairman and CEO, Mike Wirth, and CFO, Pierre Breber are on the call with me. We will refer to the slides that are available on Chevron’s website. Before we get started, please be reminded that this presentation contains estimates, projections and other Forward-Looking Statements. Please review the cautionary statement on Slide 2.
Now, I will turn it over to Mike.
Michael Wirth
Alright. Thanks, Wayne. Before we get started, I hope you and your loved ones are safe and healthy. Our thoughts are with all the families affected by COVID-19 and especially with the healthcare workers on the frontlines battling everyday to contain the outbreak.
I’m also incredibly grateful to our employees who show up every day, particularly those out in the field, operating critical facilities to provide the energy that supports the pandemic response and keeps essential goods and services flowing in support of the economy. They too, are heroes.
During our security analysts meeting in March, we discussed Chevron’s resilience. And now it is time for us to demonstrate it. No one foresaw these specific market conditions, but we were prepared for them. We know what to do, and we are doing it as we execute this five point action plan.
First and foremost, we are focused on the safety of our employees and our operations. Next, we are exercising the flexibility in our capital program. Today, we are further lowering our full-year guidance.
In addition to capital costs always matter in a commodity business. We initiated a major company restructuring last year, and we expect to drive additional savings this year and next. Capital structure also matters. We came into this crisis with an industry leading balance sheet, and we are taking actions intended to maintain financial strength.
Lastly, while addressing current market conditions, we are preserving long-term value for shareholders, employees, and other stakeholders. I will speak to each element of this action plan in the following slides beginning with safe and reliable operations on Slide 4.
We have had fewer than 50 confirmed cases of employees with the virus and nearly all cases appear to have been contracted outside the workplace. Most of our office based employees are able to work-from-home.
For those who continue working at facilities or in the field, we have implemented multi-layer screening, distancing, hygiene and PPE protocols. Our COVID-19 testing capability is ramping up. Finally, we are helping our communities with donations of money, PPE and other things we can manufacture like sanitizers in our plants and 3D printed face shields.
In downstream, our refineries are running well below capacity to meet significantly lower product demand. Where possible, we are prioritizing equity crudes into our refining system, and re-optimizing our plans for turnarounds.
In upstream, the rig count will be down by about 60% by the end of this quarter. In May we expect to curtail between 200,300 thousand barrels of oil equivalent production and we expect curtailments to continue in June.
LNG contract sales have been unaffected. Despite some logistics challenges our supply chains have been functioning with no major disruptions. We are closely monitoring financial risks to our suppliers and working with them on win-win solutions.
Now we will give an update on our major project underway in Kazakhstan. Despite the early COVID outbreak in Korea, module fabrication and shipments out of the fabrication yard remain on schedule. In fact, only seven modules remain in the yard and all are scheduled to depart this quarter.
Restacking of the modules in 10 GIS is progressing well and was ahead of schedule at the end of April. That said, the pandemic is presenting challenges. Restrictions on the movement of people and goods and positive COVID cases in six of the more than 100 residential camps in 10 GIS have triggered changes.
While critical path construction activities proceed, we are temporarily demobilizing non critical path personnel. As a result, we anticipate some degree of impact to project costs and schedule, but it is too early to quantify this in any meaningful way. Our forecast of 2020 capital expenditures for the project has been reduced by about $1 billion our share due to deferred activity, cost to mitigations and expected currency benefits.
Turning to our overall capital outlook, we are further lowering our full-year 2020 organic capital guidance to as low as $14 billion down from $16 billion announced in March. Second half CapEx could be as low as $6 billion or a run rate up to 40% lower than our original budget. The incremental reductions since our March press release are primarily focused on TCO, and short cycle investments.
Turning to Slide 7. In response to current market conditions, we expect to reduce operating costs by about $1 billion this year relative to 2019, due to reduced activity levels, lower fuel costs and curtailment of other discretionary expenditures. Beyond the current year, our initiative outlined at the security analysts meeting to lower OpEx by another $1 billion next year is progressing well.
A portion of the savings will come from restructuring, where we expect design to be finalized this quarter, with the streamlined organization in place by year end. Costs often lag during market corrections. We were already working on further cost reductions before these conditions began and intend to keep pace with today’s reality.
Turning to the next slide. The chart on the left shows our estimated sources and uses of cash under a two year stress test with sustained prices of $30 print. Our decision to suspend the repurchase program, lower costs and flex capital down will reduce the pull on our balance sheet.
Chart on the right shows we have the debt capacity to weather this stress test better than our peers. All our actions are consistent with our long standing financial priorities. And number one is to protect the dividend which we know is vital to our shareholders.
Turning to Slide 9. And the fifth element of our action plan, preserving long-term value. While we have the flexibility to take capital even lower, we are focused on the right spending to ensure that existing assets are safe and reliable. Projects already under construction are efficiently completed.
Operational and technical capabilities are maintained. Investment options are preserved for the future and we maintain our commitment to ESG priorities. During a market downturn, the playbook in our industry isn’t a secret. The key is how you execute it.
The winners are the ones that make the right choices, best balancing short-term cash flow and long-term value. We made the right choices coming into this crisis. And we intend to exit in the best position among our peers.
With that, I will turn it over to Pierre.
Pierre Breber
Thanks, Mike. Turning to Slide 10. First quarter earnings were $3.6 billion, or $1.93 per share. Adjusted earnings, which excludes special items in foreign exchange were $2.4 billion, or $1.29 per share. A reconciliation of non-GAAP measures can be found in the appendix to this presentation.
Cash flow from operations was $4.7 billion and total capital spending was $4.4 billion. In the quarter, we also increased our dividend and repurchased $1.75 billion of shares, before suspending the share repurchase program.
Turning into cash flow. Excluding working capital, cash flow from operations covered the dividend and cash CapEx and the first quarter, yielding a dividend breakeven under $50 brand. Proceeds from the sales of our interest in Malampaya were offset by loans to TCL. Given volatile market conditions, we are holding more cash and ended the quarter with a net debt ratio of 14%.
Turning to the next slide. First quarter earnings of $3.6 billion increased about $1 billion versus the same quarter last year. Included in the current quarter was a gain on the sale of upstream assets in the Philippines and favorite tax items.
Adjusted upstream earnings decreased due to lower prices partially offset by higher production. Adjusted downstream earnings increased primarily due to favorable timing effects and higher marketing margins. The other segment decreased primarily due to lower corporate charges.
Turning to Slide 13. Compared to the fourth quarter, first quarter adjusted earnings decreased by about $400 million. Adjusted upstream earnings decrease due to lower prices, partially offset by higher production and lower OpEx. Adjusted downstream earnings increased primarily due to favorable timing effects and lower OpEx.
On Slide 14, first quarter oil equivalent production increased over 6%, higher shale and tight production primarily in the Permian and higher entitlement effects were partially offset by asset sales and normal base declines.
Turning to the next slide. We are nearing completion on the asset sales program announced in 2018. In April, we closed the sale of our interest in Azerbaijan and Colombia, resulting in almost $1.5 billion in before tax proceeds. This brings our total assets sales proceeds to about $6.5 billion since 2018 in the middle of our $5 billion to $10 billion guidance range.
Turning to Slide 16. With cash on hand, access to the commercial paper market, and our backup revolver, Chevron’s liquidity position remains strong. We have limited long-term debt maturing over the next two years. And as a AA credit, we have ample access to the debt market.
Now looking ahead. In upstream, we are not changing our full-year production guidance, although we are clarifying that it excludes the impact of curtailments. As Mike said earlier, we expect curtailments of production during the second quarter. In the U.S., primarily due to economic choices that balanced cash flow and long-term value and in certain countries outside the U.S., mostly due to the OPEC plus agreement.
Plan turnarounds in the second quarter, primarily at Gorgon are expected to impact production by about 70,000 barrels of oil equivalent per day. Based on our current price and capital outlook TCO co-lending is expected to be modestly higher this year.
In downstream turnaround activity in the second quarter is expected to have an estimated after-tax earnings impact of $200 million to $300 million. Both equity affiliate earnings and distributions are expected to be lower in 2020 with the net negative effect to cash flow less than $1 billion.
With that, I will turn it over to Wayne.
Wayne Borduin
Thanks, Pierre. That concludes our prepared remarks. We are now ready to take your questions. Keep in mind that we do have a full queue. So please try to limit yourself to one question and one follow-up, if necessary. We will do our best to get all of your questions answered. Jonathan, please open the lines.
Question-and-Answer Session
Operator
Certainly. [Operator Instructions]. Our first question comes from the line of Phil Gresh from JP Morgan.
Phil Gresh
So first question here just as we look at that slide really talking about the $30 oil case. And the funding of the dividend, the priority of the dividend and adding debt to cover capital spending. At the end of that period, do you have a sense of…
Michael Wirth
Phil, you cut out, right. When you said at the end of that period, do you have a sense of.
Operator
Mr. Gresh, we are not hearing you right now. I’m not sure if it is your connection your phone.
Michael Wirth
Okay. Jonathan, we can move on to the next question. If he go back and if we can clarify that we got a good connection with him.
Operator
Our next question comes from the line of Devin McDermott from Morgan Stanley. Your question please.
Devin McDermott
I wasn’t on mute, but there, but it seems like it wasn’t going through it. If you hear me now with the, I will try to pick up where I think Phil left of on the stress test for $30 Brent. When we think about where this the stress test takes you from a leverage standpoint, or debt to capital standpoint over that two-year period. He talked a little bit about where you would end up at the end of 2021 And also where you would comfortable in terms of taking leverage to and what…
Michael Wirth
Yes, we I think we got the essence of it, which is where do you end up at the end of 2021 and how comfortable are you there as Pierre Breber do you want to respond to that?
Pierre Breber
Yes. So, thanks for the question. Look, the chart on the left gives an indication of the negative cash flow that we expect under a stress test at $30 Brent, and then the chart on the right shows our debt position relative to peers and relative to the zero line which has a net debt ratio of 25%.
And when you put the two together, where the negative cash flow or that incremental debt, it keeps us - we are still to the right of that zero line. So, in other words, we can have two years at $30 Brent, invest in the business, sustain our dividend and still exit at the end of 2021 with a net debt ratio less than 25%, which we think is still a very strong balance sheet.
Michael Wirth
Yes, I might just add Devin. We are protecting the dividends because we are set up to do so and we have made it a priority. As Pierre said, we enter with balance sheet strength that is second to none, and advantaged portfolio with a low breakeven capital discipline. That is part of our DNA. We have demonstrated it through the way we have managed capital spending, our discipline on transactions and we have got capital flexibility.
And all of this is because we are committed to the dividend and you can see that while we do lean on the balance sheet to fund the capital program, over this period of time, we can support the dividend comfortably and still remain in a very healthy position and we have set ourselves up to do so. Thanks, Devin, did you have a follow-up?
Devin McDermott
Yes. So, a follow-up just on the on the capital spending side building down a little bit. So, you talked a little bit about how you think about the tradeoff between some of the near-term cuts in capital spending, which really skewed more towards short cycle versus one of your priorities of retaining long-term optionality and continue to support longer term growth. So, that preservation of long-term value point. So, how do you think about that trade off and also how much additional flexibility if any is there as you look at the budget where it stands today?
Michael Wirth
Yes, Devin. So, a few years ago, we really had a budget that was skewed towards the long-term, end of the spectrum, and we have consciously shifted that now to have the short-term weighting much higher within our portfolio, because it gives us the flexibility that you talked about and it is underpinned with the longer term projects, but it is not dominated by those.
So, we have built a more flexible portfolio that allows us to slow down the short cycle investments when the market signal indicates that those are not being rewarded in the marketplace and yet we are maintaining the ability to ramp those up. And we have a longer term capital projects that are earlier in the phase and we will be very disciplined in bringing those forward.
The other thing that is different that is really important is a much larger percentage of our portfolio now is facility limited, versus reservoir limited and characterized by the kinds of declines that you can see in a different portfolio. And that enables us to hold production with more modest capital spend and preserve the cash flow that is associated with that.
So, look, we are conscious of things like leases, we are conscious of the way we are developing our resources, but we are trading those things off and when the market is not calling for near-term production, we shouldn’t be investing to deliver it. We should be conserving the cash for another day and that is really how we are balancing this out. Thanks Devin.
Devin McDermott
Great. Thank you.
Operator
Thank you. Our next question comes from the line of Doug Leggate, Bank of America. Your question please.
Michael Wirth
Doug, were still challenged here with this audio situation. I’m afraid we are not hearing you. I apologize for this. Jonathan, can we try to…
Pierre Breber
Yes, Jonathan, why don’t we pivot to the next question? The next in the queue.
Operator
Okay. Our next question comes from the line of Neil Mehta from Goldman Sachs. Your question please.
Neil Mehta
Alright. Well, thank you. So I guess the first question was around curtailments. And can you walk us through with a little more depth about where they are magnitude? And as we think about production shut-ins, what gives us confidence that there won’t be any structural damage to the assets and we have confidence that supply can return when the market ultimately needs it?
Michael Wirth
Sure. And so let me just frame it up a little bit, Neil. I was just talking to Devin about balancing cash flow and long-term value and that is certainly a key driver here as we are looking at curtailments.
We are trying to avoid the need for abrupt shut ins. So these truly are in broadly speaking curtailments rather than the shut ins, with a very conscious effort to preserve reservoir and well integrity. We do these things for turnarounds for storms and the like. So we know how to do this quite well. And we really don’t expect any issues as we ramp backup.
Curtailments in April were relatively modest, as Pierre outlined with the forward guidance May in June look like they could be more significant. About 50/50 between the U.S. and rest of the world. And certainly in the U.S. the Permian and the short cycle piece of it is the predominant part.
Around the rest of the world they tends to be related to OPEC and OPEC Plus commitments in the way those are translating into local conditions. But we are very cognizant of where and how we slow production and expect to be able to return production when the market changes in relatively short order without putting reservoir well integrity at risk.
Neil Mehta
We see that you put a pause on the project or at least slow down spending. So, can we do a status check of how far you have gotten so far, and how it is progressing? What the ultimate plan is around execution from here, and in any early thoughts on what that slowdown could mean for the full project budget?
Michael Wirth
Sure. So the project is about 75% complete right now Neil, construction 56 or so percent. Logistics are working very well, as I said, there are only seven modules left in Korea and all of those will have departed by the end of this quarter.
We have got a number on the water, additional ones at the transshipment locations and some moving through the waterways. So the logistics are moving quite well. Since late 2019, we have got all of the pipe racks and the gas turbine generators and utility modules on foundation and we continue to work on the critical path.
Locally, I mentioned we have seen COVID cases in a number of the camps, there is over 100 different residential camps there. And as a result, we are de mobilizing non-essential staff to minimize the risk of spread. That means we are de mobilizing about 17,000 people to 20 different locations. Most of these are contractors, not employees of TCO. But we are helping to manage the logistics.
We are moving people back to other parts of Kazakhstan, Turkey, Russia, Singapore, the UK. We need to provide context tracing information for everybody who demobilizes, we have converted a fire station and a - test center. We are testing 1,500 people a day. We have got 29 nurses there working around the clock.
So a very thoughtful effort on how we demobilize. The people that are remaining are working, in essence under a pod strategy where workforce is isolated by shift and by crew. We have got boxed meals, digital permits. We have got dedicated drivers and cleaners and things to really reduce the risk employees are all outfitted in proper PPE and alike.
We actually are maintaining pretty good schedule progress on the critical path, in spite of all of this, which allows us to focus the workforce on critical path. And to demobilize, some of the non-critical path activity.
Our power and control work, the gathering system, the sour gas injection system are all several months ahead of the critical path. And that enables us to slow down and mitigate some of these risks.
The biggest challenges are in the area of crew changes. So we have people working on some extended rotations, transit in and out in the labyrinth of travel restrictions of each level cities, countries, et cetera is something we are managing aggressively and carefully. We are testing people as they arrive to minimize quarantine on arrival.
So a very focus and thus far, I would say a very successful effort to respond to this. The main focus is on the pressure boost facility and the utilities in the processing plant, which are on the critical path.
In terms of the actual reduction in C&E, our share a about a billion dollars, about half of that is deferral of activity. About a third of that is mitigation of cost growth through aggressive creative measures. And the balance is really related to foreign exchange.
So hopefully that gives you a sense of where we are, and certainly, as we go forward on every call, we will know more, we will see how things have unfolded there, and we will provide you additional information as we have it.
Pierre Breber
Thanks Neil.
Operator
Thank you. And our next question comes from line Jeanine Wai from Barclays. Your question please.
Jeanine Wai
So, my first question now that you can hear me is on sustaining CapEx. And we know, Mike, that you don’t really talk about sustaining CapEx on a one year basis at all. But can you comment on whether the new 12 billion annualized CapEx run rate is enough to maintain what you would consider acceptable reserve replacement ratio over a longer term period and whether this can also allow you to achieve your corporate objectives of increasing RSE, shareholder returns and all that, but maybe at a different rate from what you thought before?
Michael Wirth
Yes, Jeanine, you are correct. This really isn’t a way that we think about the business, it is not something we rely on or plan around to measure the business. So, it is not an simple question to answer, because it is just not how we think about things.
We do understand it is a question among some in the investment community, Pierre has been thinking about how to try to help you guys understand this a little bit better and translate from how we run the business to how these questions come in. So Pierre, maybe you can help Jeanine with that.
Pierre Breber
Yes. Thanks, Jeanine. And as Mike says, we don’t think about the business that way and to the earlier question. We are not sustaining short-term production, right that is a very deliberate choice. Mike talked about that the price signal says we don’t need a short-term production, and we are prioritizing capital on long-term value.
So, again if sustaining short-term production is part of the definition, then it is just not how we manage the business as we are trying to balance the short-term and the long-term. But if we think of sustaining capital as kind of an analytical construct, that is really the capital to keep upstream production capacity flat from existing fields for a number of years, and so in that definition, I would exclude exploration, I would exclude capital to develop new fields or for expansions like into in 10 GIS, I would exclude assets that are sold or contracts that are going to expire and I would exclude downstream and chemicals.
And so if you if you go through that, and we talked about 11 billion for upstream based business and shale and tight total capital, and that results in some growth, about 10 billion would be a reasonable estimate of the capital to keep that production capacity flat from existing fields for a number of years.
Again, we are below that right now. Right, we started with bass and shale and tied at 11. If you roll through the reductions will be under eight. So, again, short-term production we do not expect to be sustained at your kind of notional $12 billion capital which includes downstream and chemicals with some cuts and exploration, but long-term value is preserved. Thanks Jeanine.
Michael Wirth
Did you have a follow up Jeanine?
Pierre Breber
No.
Michael Wirth
Okay, fine. Next question.
Operator
Alright. Our next question comes from the line of Paul Cheng from Scotia Bank. Your question please.
Michael Wirth
We will be patient here, because it seems like it takes 15 or 20 seconds for this to start. So Paul, hang in there and we are waiting on you.
Paul Cheng
I think since that potentially that we will cut off, so I would ask both questions. I think the first one Mike, not that you will have a target now, but that the sector is being compressed and a lot of your peers is under distress. If there is a one view, how much is the balance sheet you are willing to risk in this current moment for the right deal at all?
And the second question, may as well that ask that first, in case I get cut off. This is for Pierre. You have a strong balance sheet, but it looks like you are going to have a substantial cash burn for this year, next year, and three depressed pricing in the moment that we see. You raise some debt, but you make sense for you, given the debt market has actually open and the cost is quite low for you at this point to raise even more debt to pre-fund the potential cash burn or that you think the commercial market is with available and you don’t need to do that?
Michael Wirth
Okay, yes, Paul, you are an experienced multi part questioner. So I think that was good to get both of those in. Let me let me give you a quick response and then Pierre, I’m sure will have some thoughts he would like to add there.
The reason we showed this low prices stress test Paul was to give you a sense that we really can endure a couple of years of really tough pricing, and our gearing would move back to a level that is not an uncomfortable level to be at.
In fact, Pierre said frequently, that overtime we would anticipate moving our gearing back into the kind of 20% to 25% range. Anyway, now this isn’t necessarily the way we thought we would get there. But that is not an uncomfortable place for us to be.
So leaning on the balance sheet through this period of time is something that is very doable that will maintain a strong credit rating as we do that. And so we are certainly willing to go there. And as you know, in years gone by you go back a few years ago, our gearing was above that 25%.
And so I think we are in a range that we have demonstrated, we can manage, and we know how to. In terms of going to debt markets at low cost, I do think that it is prudent to look at that. And debt is attractively priced right now, and it wouldn’t be surprising for us to look to add to that. So Pierre, maybe you can comment on that.
Pierre Breber
Yes, I think there was an M&A question to there about using our balance sheet for M&A. But that I think I can just address. You can also use equity as part of a transaction, so we don’t view the balance sheet as the only means to do M&A, because equity makes sense in an oil deal where there is price risk and obviously price volatility and you wouldn’t want a winner and loser between the buyer and the seller on an M&A deal.
In terms of, I think Mike address the debt question. I mean, as we consume cash, we will lengthen the maturities, we will look at when there is a good window to approach the bond markets. We do have access to a lot of commercial paper that was shown on the liquidity side.
Commercial paper still remains, the lowest cost and the most flexible source of funding for us, but under these kinds of conditions, and if the conditions persist, we would want to have some more longer term debt that would be appropriate. And I think as Mike said, you shouldn’t be surprised if you see us approach the market.
Michael Wirth
Thanks Paul. I’m sorry, I missed the M&A angle on your first question. Okay, let us go to next question.
Operator
Our next question comes from the line Paul Sankey from Mizuho. Your question please.
Pierre Breber
Hang in there, Paul, for some reason, we are still working through the delay. Paul, we are ready for your question.
Paul Sankey
Hello, can you hear me?
Michael Wirth
Yes. We have got you, Paul.
Paul Sankey
The question is, how is the world changed for you post this thing? Obviously, we can see the future strippers is pressured for 2021. And I think you have addressed that a little bit. I think it is clear that your mega projects Australia, Kazakhstan sort of continue as they were, and ultimately have very low breakevens when they are running. I guess the question would be, firstly on the Gulf of Mexico is the world do you think different there. And most importantly, obviously, for your Company, we know that you wanted to buy Anadarko for the acreage in the Permian. How do you think that the world has changed with regards to the Permian given what is happening? Thank you.
Michael Wirth
Okay. thank you Paul. Well, I think when you are in the depth of something as unprecedented as this. It is hard to say exactly how the world will change on the other side of it. And as much as it feels like this has been going on for a long time. We are really just a couple of months into it.
And so I think on the other side of it, I’m an optimist. I have great confidence with all the resources being dedicated to vaccine development and therapeutics and testing capacity. I’m an optimist that in time the health risks will be successfully mitigated and managed.
I believe that the world will return to some post Corona Virus form of normal and that means economic activity. It means growth, it means travel. The pace and the patterns at which that reemerge is I think are still open to a wide range of views and I don’t know that anybody can predict that exactly.
But when you translate that back to our industry, I think it plays into some things that we have long believes, which is low cost of supply matters. Operational excellence and discipline in project execution matters, capital, discipline matters, cost, discipline matters.
And all of those things will become very apparent as we recover in some form with inventory length in the market with OPEC production off and with the opportunity for shale and tight to come back in relatively rapidly.
And so I think, the term lower for longer has been used for a while to describe conditions. I think that is even more appropriate today than it has been in past times when it is been used. I think we need to be very focused on an efficient use of every one of our resources to operate well and to drive the cost of supplies down in a world that looks like it will be pretty well supplied.
So, you get to the Gulf of Mexico and the Gulf of Mexico has been resetting its cost structure to compete in a world like this. I think it means we have got more work to do to make the Gulf of Mexico compete even more, more focus on tiebacks, infill drilling, utilizing existing infrastructure and finding efficient ways to develop in the Gulf of Mexico and so that trend is one that we need to stay on. We have made a lot of progress and I think there is more work to be done there.
In the Permian, our we are not done improving in the Permian. Our results, even as we sit here today, continue to improve and so well costs come down, drilling efficiency improves, completion, design and execution improves, and the hydrocarbons haven’t gone away the rocks don’t go bankrupt, and companies might but the rocks won’t. And I think that that is a resource that will continue to be very important in the overall supply picture and certainly, it will be for our company.
And so we will look to invest in the very best projects, we will look to acquire assets and opportunities, be they through exploration or other means that will compete in our portfolio and continue to be attractive in a world where low cost of supply and the ability to generate good returns matters.
So, in some ways, those fundamentals are only more important going forward than they have been Paul and beyond that. I think it is speculation on a lot of the other things you hear people talking about.
Pierre Breber
Okay, so we are going to pull an audible here. I have actually got Doug Leggett’s questions keyed up, he had trouble dialing back in, so he texted me his questions, Mike. I’m going to feed them to you that way.
So, the first one was for Mike shale thinks the whole industry needs a reset a change in long term supply et cetera. They just cut the dividend to adapt. What do you think of the big picture at this point? And then the second one will be for Pierre.
Michael Wirth
Okay, look, I think everybody is - it is interesting, Doug and apologies we couldn’t get you on the phone directly here. I wish we could have the conversation directly. I think we have actually seen more of a divergence in strategies and thinking among companies in our industry over the last few years, and we haven’t a long time.
And everybody’s got a slightly different take on where they are going and where their strengths are. And so I can’t speak for another company. I will just tell you, it is very similar to what I was saying in response to Paul Sankey question.
I think the companies that can be reliable efficient low cost providers will continue to have a very strong position as leaders in our industry. And the world is not ready to transition to another source of energy in large part anytime soon. And so the resumption of economic growth will require the sources of energy that we know today and that fuel the world today. And there will be a need for what we do.
And I think you have to be very honest with yourself about where you are going and where you are not. And you have got to focus on improving in closing gaps where you need to improve and getting even better where you have strengths.
So, again, it kind of gets back to the fundamentals, capital discipline, cost discipline, project execution, and the ability. And I would say it, if we haven’t said it clearly enough. Your balance sheet is a great asset. And oftentimes we think of our upstream or downstream assets as the most important asset and they are very, very important in our business.
The balance sheet is also a very important asset, you have to treat it with a priority, you have to be prepared for the day when you need to rely on that asset, and I think that also becomes very, very important, as we move forward. We have been prudent in the way we have managed that, we were positioned differently than others as we went into this.
And I think you can see, as I said, while we wouldn’t have predicted this exact market scenario, we were prepared for an environment like this. And we will navigate our way through it with our shareholders in mind. Second question.
Pierre Breber
Yes. Second question is around cash CapEx, of the $14 billion guide, how much of that cash CapEx? And how much further can that go down without impeding cash flow in production?
Yes, so again, sorry, Doug, we couldn’t get you on. So that 9.3 billion is the cash CapEx equivalent to 14. So it was it was 10.5 at 16. So it went down 1.2 of the 2 billion additional reduction is in cash capital.
I think Mike has addressed that I addressed it with sustaining CapEx. Again at the CapEx levels into Jeanine’s question when we are at $12 billion, when you back out, reduced downstream and exploration, we are below the level to sustain short-term production. And again, that is a deliberate decision, because there is not a lot of value in putting capital that results in production at current prices.
We are investing and I should have said to Jeanine’s answer, although we are below the $10 billion let’s call sustaining capital on bass and shale and tight which will cause some decline. We are investing in TCO, FGP/WPMP which will come on in 2022 and 2023 and provides that kind of long-term value.
So again, the choices that Mike and the leadership team are making are really balancing the short-term and the long-term and being thoughtful about where the capital reductions are and where the capital investments are.
Michael Wirth
Thanks, Doug, for your questions. Jonathan, we will pick the next one in the queue.
Operator
Certainly. Our next question comes from the line of Pavel Molchanov from Raymond James. Your question please.
Pavel Molchanov
Thanks for taking the question. Along the lines of what you said about the energy transition you know not being as realistic perhaps as what a lot of folks are saying. Your CO2 targets assumed pre-COVID production rate, given that across the board volumes will be coming down. Are you looking to upsize those decarburization targets that you put out last summer?
Michael Wirth
Yes, Pavel, it is interesting. Everybody in the industry has defined their targets just a little bit differently. And we haven’t actually put out absolute targets, which you would expect absolute greenhouse gas emissions to come down if people are restricting activity. We put out intensity targets.
So a greenhouse gas emissions per unit of production. We had a target for per barrel of oil in the upstream we had a target performance for gas production. And then we have got flaring and methane emission targets. All of which are unit targets that drive down unit emissions.
And so we have not reset those, we would expect that we will continue to reduce our greenhouse gas emissions, irrespective of COVID or any of these other circumstances, these are commitments we have made, we have tied people’s compensation to them. And we intend to continue to reduce our emissions footprint.
Pierre Breber
And just the other add to the other distinction is that we have done it on an equity basis. So whether we operate or don’t operate our whole, all the barrels or all the MCS are in those intensity metrics that Mike talked about, not just our operated barrels.
Pavel Molchanov
Alan, if I may. Is there any change in the historical linkage between Asian LNG prices and Brent crude given what is happened in the last 60-days?
Michael Wirth
Probably contracts have not changed and of course, we sell most of our volume on contract. Our contracts typically are linked to not linked to Brent directly, but linked to JCC or Japanese crude cocktail is another one is linked to a JKM index, which is a gas related index.
So I think commodity prices, have some sympathetic relationship with one another, but they are not always perfectly correlated. And so I think you would certainly say that our crude linked contracts will reflect crude prices.
And to the extent Brent has come off, eventually our accrued linked contracts will reflect that, they tend to be on a lag basis. And so they don’t always reflect current month pricing. But broadly speaking, yes, you will see a connection between those two.
Operator
Thank you. Our next question comes from the line of Doug Terreson from Evercore.
Doug Terreson
Good morning everybody. Mike, you guys were an early and a power adopter of the discipline capital management model and that is obviously serve your shareholders well during the upturn, and now the downturn too. So first, kudos to you guys for that. And then to the points about industry stress I think Paul brought up earlier, which often lead to consolidation. My question is well, financial benefits are often available on a variety of transactions, strategic benefits on the scale that you guys received from Golf and Texaco and Unocal back in the day, may or may or may not be this time around. And so I want to see if you find a strategic condition today. How you think it is similar or different from prior downturns given your history. And also any other notable color or philosophy that that you want to share on this topic?
Michael Wirth
So, I guess if you go back, all the way to Golf. And that takes you back to the 80s. The industry was highly fragmented even amongst the largest players. And so there were, as you say, financial benefit of consolidation and there were strategic benefits as you brought together portfolios that had that had gaps in them.
And we certainly saw that with Gulf, we saw it again with Texaco, I think today we have got fewer large players and so the impact of any single transaction that is not amongst large players, and those are pretty hard to do as you get down to small numbers. They are less profound both from a financial standpoint simply because you are you don’t have the same scale that you are consolidating and it flows through to the asset portfolios.
And so that the players that like ourselves in our big peers have exposure to many basins around the world to all segments of the value chain. And I think everybody has worked to try to optimize their portfolios in a way that I think fits with their strategy.
And so I think your point is a good one you can do kind of rifle shots, that would be maybe smaller bore both on the financial and the strategic dimension that could fill in nicely. But things that would be transformative the way we saw back around the 99 and 2000 period.
I think you are right. I think that is a lot harder to envision today. Everybody’s become more efficient and so even the synergies that, that we saw back then, our technology was different information technology was different, our productivity was different and so I think competition has made everybody sharper and more efficient financial synergies are harder to capture.
Doug Terreson
Okay. Thanks for the color Mike.
Michael Wirth
Okay Dough. Thank you.
Operator
Our next question comes from the line of Biraj Borkhataria from RBC. Your question please.
Biraj Borkhataria
So, I will get my two questions just in case. But um, the first one is on the Permian and shut-ins driven by economics. So, I guess you mentioned that 50% of the curtailment is in the U.S. and then most of that is the Permian. I was wondering if you could talk about the process on how you got to the number you are looking to curtail and why that is the appropriate number for the environment. You see, that would be the first question.
And then second question is on the on your CapEx reduction. Obviously, part of this is economics, but there is another element which is not necessarily choice. So, you mentioned slowing down and then 10 GIS. I was wondering if there is an element of the CapEx or quantify the element of CapEx that is simply CapEx that you couldn’t spend even if you wanted to for logistical reasons or otherwise, just trying to get a sense of that would be helpful?
Michael Wirth
Yes. Okay. Well on Permian curtailment. We have said we have pulled capital down significantly so we are not putting capital into bring new production online and as you are looking at flowing production, not every barrel is created equally we have got we have got some older vertical wells, for instance, that, that in this kind of an environment have pretty marginal economics, we would look at those.
We have got barrels that have a different oil gas ratio, we would look at that, we look at net backs logistics and value chain cash flow, storage cost future prices, a whole host of things and then as I mentioned earlier the desire to avoid a future need for abrupt shut ins if we receive logistics and flow curtailed.
So there are a series of things that we have got a team looking at across the entire basin, and factoring into decisions that we think are prudent decisions from a value standpoint and an operating standpoint, and it is a moving target.
We, actually this is something that our senior leadership team is involved in multiple times a week. And so the models to do this to understand markets and to stay really in touch with markets, to be sure we are making good decisions continue to be informed by new information and so it is a very dynamic process that we are engaged in right now.
On the capital side on the kind of nondiscretionary non our choice capital Pierre can you take?
Pierre Breber
Yes, I think the vast majority are our decisions and choices we are making. But it gets into how you define it, for example, it can gives, we are choosing to demob the noncritical path, project personnel. But clearly that is, that is COVID related. So I don’t know, if you call that a choice.
We have a crisis management team that is overseeing supply chains and the whole system. But the bottom line is the vast majority, our decisions that we are making. In some cases with partners we are seeing in almost all cases, partners are very aligned on actions that we are taking.
Now we do have some currency effects, right, so the dollar is stronger. So there is part of the capital reduction. It is also very modest. That is a reflection of currency effects. But I would look at the vast majority of the 30% reduction as being choices that we are making to flex capital, pace capital, defer capital that is largely driven by our decisions to balance cash flow and long-term value. Thanks Biraj.
Biraj Borkhataria
Understood. Thanks.
Operator
Our next question comes from Jason Gabelman from Cowen. Jason, your line is open. You might have your phone on mute. And we are still not hearing you.
Michael Wirth
Okay, I guess we see. It looks like maybe he’s dropped off. Okay. Let’s go to the next question, Jonathan.
Operator
Certainly. Our next question comes from line Sam Margolin from Wolfe Research.
Sam Margolin
So I will ask sort of a focus question. We have gone over a lot of high level stuff. But, because your downstream footprint, I’m pretty good look into Asia. Some other operators have been talking about some interesting observations they have made about, the timing disparity between Asia emerging from COVID crisis versus the rest of the world and kind of using it as maybe a soft proxy around the slope that demand might recover or what that might look like on the other side of this. Could you share whatever observations or thoughts you have around what you are seeing?
Michael Wirth
Yes, Sam, it is a great quote from [indiscernible] Asia is a figment of the Western imagination. He said it was more of a cultural quote, but it is a big area is the reason I bring that up. And what is happening in China is different than what is happening in Indonesia right now.
And what is happening in South Korea is different than what is happening in Thailand. And so, broadly speaking, I would say, Asia and other parts of the world, it would appear the demand has found a bottom and that we are kind of bumping along the bottom right now.
And the biggest hit has been on aviation fuels. And then you have got gasoline, which is off 50% give or take around most of the world’s diesel, more like 25%. And so these numbers generally hold in most of the places where we are doing business right now.
And then you have regional signals and signs that things are starting to move. China clearly has come off the bottom. Some other markets in Asia that have seen kind of a second wave and they have reinstituted some of these lockdown type policies. The green shoots seem to have pulled back a little bit.
So I would say it is highly specific to the market in Asia where you are. But there are certainly signs in a number of markets of a resumption of activity and resumption of demand growth. And they tend to correlate pretty well with when the policies are relaxed, and people can begin to get back to work and start to move around again.
And so I think there are small positive signals, we are getting earlier this week where we talked about it being the beginning of the - beginning. I think, it feels like we are finding the bottom right now.
And then the path up out of this is likely to be different, in different regions of the world as it ties to the health status in those parts of the world. But I think this quarter, and perhaps next quarter feel like we are about in the as I said, bumping along the bottom and going to begin to emerge out of it here at some point over that time. Thanks Sam.
Sam Margolin
Okay. Thank you so much.
Operator
Our next question comes from line. Brian Todd from Siemens Energy. Your question please.
Brian Todd
Great. Good morning everybody. Maybe a couple quick one. The $2 billion of additional CapEx cuts on the fuzzy charts. It looks like it is coming from a kind of spread across all businesses. Any additional color and where the cuts are coming from and in the Permian, I think that the X rate at the end of the year was still the same. So maybe any thoughts and how we think of the trajectory there in the Permian? And then I have follow-up.
Michael Wirth
So the two billion. Broadly, you can take about a little bit less than a billion coming out of a major capital project. And that is primarily TCO. So we had already factored in a little bit of reduction in TCO in the first reduction down to 16, but not nearly as much as we are seeing now. So call it 800 million or so on major capital projects.
About half a billion each on unconventional and on other bass business, and the unconventional would include not only Permian, but also Argentina and Canada. And then about another 200 million coming out of downstream and chemicals.
So I think if you take those and wrap them up, that gets you to the, to the two billion. On the Permian, our guidance still is that will exit the year at roughly the level that we came in are 125,000 barrels lower than what we had initially indicated, if you were to look at the chart we use at the Investor Day meeting.
And notwithstanding the fact that we are seeing some curtailments there and we are pulling back on the rigs. The momentum coming into the year has been strong in Permian production growth in the first quarter, which largely reflects wells that were put on production last year and we had more pops in the second half of the year than we did in the first half of the year.
First quarter Permian production was strong and so that will kick out here over the middle part of the year and come back off as the effects of the capital reductions and curtailments are roll through the system, but our expectation is that we will exit roughly, where we entered, which is about 125,000 less than numbers we showed you in early March.
Brian Todd
Right. Maybe one. I know there is a huge amount of uncertainty right now is a clear but maybe thought that implications as we think of the recovery coming out of this and in a very specific cents on curtailments. what is the what is the signal is it clearly just is it just a nut bag price that will drive the resumption of those volumes, at least on the ones that you operate and control. And then as we think about the budget, as we move out of the current level of spend and you start to work your way back towards maybe the $20 billion level that we were in before, I mean, how do you what are the sort of signals that you see that will, I guess first allow you to turn on curtailed volumes and then allow you to put rigs back to work and in the Permian?
Michael Wirth
Yes. So, on the first one on curtailments, I was either going to be market signals or on the economic value of those barrels and net backs will be an important part of that. We will also because we can pull some of these things through the value chain into markets we can what export markets look like what are we have got a refinery that we pull some of our permanent production into.
So, refining margins in the value chain opportunities will play into our thinking there as well. So, we look at these things across the entire value chain, but it’ll be an economic signal that says these barrels are being called for by the market and contribution is more positive.
In terms of the capital spending, those are longer cycle decisions than curtailments. And I think you can expect us to be thoughtful and not rush capital back into the market prematurely. But it will be our view on where markets are headed. So, curtailments is kind of more or less where markets are or where they are likely to be in the relative short term.
Capital spending is going to be more of a medium term, kind of a view and it is because this flexible asset class, we don’t need to really look at the long term signal we always we always factor that in.
But the medium term given the production profile on each individual unconventional we will be looking at signals that suggest that that is strengthening and that the demand is there and you are going to watch OPEC, you are going to watch inventories there is a whole series of indicators. I think that will help us inform decision making there.
Pierre Breber
Thanks Brian.
Brian Todd
Thank you.
Pierre Breber
With that, I would like to thank everyone for your time today. And we do apologize for some technical and audio challenges, rest assured the transcript will certainly be posted shortly after the call today.
Michael Wirth
Yes, I appreciate your patience and I apologize for the technical difficulties. I’m not sure what happened, but not only will the transcript be posted, but this will be investigated and corrected.
Pierre Breber
Please stay safe and healthy. Jonathan, back to you.
Operator
Thank you. Ladies and gentlemen, this concludes Chevron’s first quarter earnings conference call. You may now disconnect.
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