Exxon Mobil Corporation
Q2 2020 Earnings Call Transcript

Published: 31 Jul 2020

[Operator:]

Good day, everyone. Welcome to this Exxon Mobil Corporation Second Quarter 2020 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the call over to the Vice President of Investor Relations and Secretary, Mr. Stephen Littleton. Please go ahead, sir.

[Stephen Littleton:]

Thank you. Good morning, everyone. Welcome to our second quarter earnings call. We appreciate your participation and continued interest in ExxonMobil. I am Stephen Littleton, Vice President of Investor Relations.

[Neil Chapman:]

Thanks, Stephen. It's great to be on the call this morning. I hope that all of you joining us and your families are safe and healthy, and I want to extend the gratitude of everyone here at ExxonMobil to all of the men and women working on the front lines to fight the virus and to help those suffering from its effects. I'd also like to thank our employees for all that they are doing to support the response efforts globally. As we indicated during the first quarter, we anticipated the COVID pandemic and related economic shutdowns would significantly impact the financial performance of companies across multiple sectors in the second quarter, and we've seen that reflected in the results announced to date. As Stephen just discussed, the same external factors were evident in our second quarter earnings and cash flows. However, there's reason to be encouraged that we may have seen the trough in April when WTI hit a historic low point and then began to rebound as economic activity picked up and demand showed signs of increasing. By the end of the quarter, WTI had risen to around $40 per barrel, with Brent trading slightly above that, and oil prices have remained relatively stable at that level in recent weeks.

[Stephen Littleton:]

Thank you for your comments, Neil. We'll now be more than happy to take any questions you might have.

[Operator:]

. And we'll take our first question from Jeanine Wai with Barclays.

[Jeanine Wai:]

My first question is on the debt. And in terms of the commentary that Exxon doesn't need to take on any additional debt, it implies a price and CapEx assumption. Can you provide a little more color on what your price assumption is? And what range of demand scenarios would you look at compared to what you laid out in the presentation, which was really helpful? Just wondering also if the message is that Exxon will adjust CapEx through the price environment regardless of what the impact on production is in order to just pull the line on that debt.

[Neil Chapman:]

Yes, this is Neil. Thanks for joining the call. Good to hear from you. Of course, as you are aware, in the response to this environment, which clearly has been unprecedented, we've never seen the market demand crash so far, so deep. We've never seen prices and margins crash so much, and that's why having a strong balance sheet is so important. And I would tell you, that's why the financial discipline of this corporation over many, many decades has been so critical. It means you can weather the big storms. It means you can weather the large-scale disruptions. And of course, it also means you can reward the loyalty of our shareholders by sticking with them when the business recovers and sticking with the plans we have in place to protect this balance sheet and maintain our dividend. As we've just been discussing or describing, we took really, really decisive steps for this year, so the short-term capital spending reduction of 30% to 15% in operating expenses. This is very much in line with what we saw in our April earnings call. You will recall that Darren laid out our plans then. What we said we needed to do at that time, we've done. The results are on track and are in line with our expectations. So we set out the plans for this year with these reductions. We're now developing plans that are going to enable us to maintain our capital allocation priorities over the near term, and these plans contemplate a price environment that's generally consistent with third parties. Of course, we've seen the third-party assessment of the price environment going forward converge, and we're in line with those. Our plans to maintain our debt at the current levels and maintain our dividend include further reductions in operating expenses, and we're working hard to identify additional opportunities to what I always describe as efficiently deferring more CapEx, and that preserves the optionality and the future value that responds to these short-term needs.

[Jeanine Wai:]

Okay. Great. That's really helpful. My follow-up, I guess, just on the further CapEx reductions that you mentioned. If oil prices are modest and you're looking to any potential delays from more projects, you've mentioned in the past that there's always a cost associated with delaying those projects. And so can you just address that? And what kind of projects you might think like the opportunities to defer? I know the run rate of $19 billion that you're talking about is significantly lower than the 2020 budget. On the flip side of things, given the project backlog, at what point does M&A become a more attractive option in sort of delaying things as a means to kind of grow the medium- and long-term cash flows?

[Neil Chapman:]

Yes. Thanks, Jeanine. Well, we remain committed to progressing the structural improvements to our earnings and the cash flow that we've laid out for the last 3 years, but we have to be more selective in pacing those investments in light of the market environment. And of course and as we've described and actually Darren described as well in April, we've completed a thorough review of all of our ongoing investments and our ongoing investment opportunities. But in our business, that means you got to work with the resource owners, you've got to work with the partners, you've got to work with the stakeholders. We've got to identify areas where we can defer spending but conserve cash in the near term and, of course, preserve that long-term value. What we have done, and I think we've done really successfully, is we've identified market efficiencies, we have identified project synergies that will offset the cost of these deferrals. But there will be impacts. I mean that's for sure. And there will be impact mainly in timing, and that's to the earnings and cash flow potential that we've previously communicated. So it's clear, I think, from our comments and our actions. In the short term, we'll defend the balance sheet, and we'll protect the dividend by taking short-term postponements in capital investments. In terms of what we will do next year, of course, we're working through that now, and that's part of our annual planning process. And we're working through that now. And as you're well aware, our planned process concludes with a review with our Board of Directors in November. That will be the same this year as it is every year. And when we have clarity on what that capital spend will be next year, of course, we will communicate it to you. As I have mentioned in my comments, my expectation is our capital spending next year will be lower than the fourth quarter run rate. In terms of M&A and could that provide a different option to -- I mean, Jeanine, of course, we're looking at that all time. We're looking all the time. And if the right opportunity comes up, then we may elect to move on that. But what I would say is, and I said this before and I certainly said it at the Investor Day, we have, I would say, the very richest set of competitive investment opportunities within this company already. I mean I don't think there's a company out there that can compete with that, and so there's no need for us to do an M&A. We don't need to do that. We have very, very attractive investments to make, but we always look at that option.

[Operator:]

Next question comes from the line of Jon Rigby with UBS. We'll move on for now to Doug Leggate with Bank of America.

[Douglas Leggate:]

Can you all hear me okay?

[Stephen Littleton:]

Sure can, Doug.

[Neil Chapman:]

Yes, we can, Doug.

[Douglas Leggate:]

So a lot of questions. I'll stick with two. Neil, you talked about your run rate CapEx being $19 billion in the second half and below that in 2021, and you are still growing the Permian, and you're still executing Guyana. Can you then confirm that, that would still include growth capital? And what I'm trying to get to is some idea of what ExxonMobil sustaining capital is, in other words, ex growth, if you can help me with that.

[Neil Chapman:]

Yes. Thanks, Doug. Just to clarify one point. Our run rate of $19 billion is in the fourth quarter, not the second half, just so you're aware. And what I said is I expect, Doug, it will be lower. We will fund all the Guyana opportunities as they come forward. Of course, as we look at our capital spend, we're looking hard at the priorities on them. And Guyana, we will continue to fund, and you're well aware that Liza 2 is in construction. I'm confident we'll move on Payara as well. In terms of the Permian, one of the great attractions of short cycle is you can take that capital off quickly. And of course, you can put it back on pretty quickly as well. Our current planning is that we will continue to reduce the number of rigs we have out in the Permian through the second half of this year. I think we are about, if I remember the numbers, about 30 rigs in the Permian at the end of the third quarter -- at the end of the second quarter. I would anticipate we'll be in the range of 15, maybe 10 to 15 at the end of the year, and that really is just a short term to manage our current capital planning. Those rigs that we have in the Permian will be focused on that Poker Lake development. So what we're doing is we're concentrating, we're concentrating our developments in the Permian in that core activity in Poker Lake that we've talked about for the last 2 times, the last 2 Investor Days. I would tell you in terms of ongoing sustaining capital, I'm always reluctant in our business to put a number to that because as your portfolio changes and as you make divestments, it's not a number to lock in, and I'm really, really reluctant to put a number on that. I would tell you it's somewhat easier in the Chemicals and Downstream businesses. I mean I think an order of magnitude on sustaining capital in those businesses will be in the $2 billion to $4 billion range. But I think in the Upstream, it's more difficult to quantify in that way.

[Douglas Leggate:]

I understand this is tricky, and I appreciate at least framing the answer. Gosh, I'm going to go to Guyana, if I may, on my second question. You used an interesting term of phrase, there is a potential for a delay. And if I preface my question like this, our understanding is that the Payara hole is well ahead of schedule. I believe in Indonesia right now, there or thereabouts. My understanding is also that Bayphase has not yet finished its review of the development. And although we do not yet have a government, everything seems to be ahead of schedule. So what exactly are you signaling on Payara in terms of the risk or the potential for delay?

[Neil Chapman:]

Well, Doug, it's really very simple. Everything we and the partners can do to progress Payara on schedule, we are doing and we've done. I've said to our organization many times, we need to be ready to move as soon as the government is ready. And we are ready. We're ready to FID this project, but we need an approved development plan, and that approved development plan needs to come from the government. And all the work with Bayphase and on the development plan, that's been worked for a long, long time. Of course, we're waiting for a resolution, like everybody else, of the election. And I think you're very familiar with what's happened down there. There was a vote, there was the recount and then there's been a series of legal actions that have taken place since that time. What we know is that all parties in Guyana want to progress this development. Of course, we're in regular contact with both President Granger and the APNU+AFC coalition, and we're also in discussions with the PPP and Jagdeo and Irfan Ali. And what we continue to stress to the government is that if the project does get delayed, it's a loss of value to the country, and they understand that. It's very, very clear the government understands that. It's very, very clear, the Ministry of Energy understands that. It's very important that we get this development plan so that we can FID in the September time frame. There are weather conditions that if you meet -- miss a certain window, it could result in delay of some months, and that's what we're trying to work towards. I'm confident this will get resolved, but Doug, it's -- we need that approval of the development plan, and that's what governments have to do. And obviously, we'll work with them. And as I said, we're ready to go.

[Douglas Leggate:]

And thanks for the restatement on the dividend.

[Neil Chapman:]

Yes, yes. And I appreciate it. Good to hear from you, Doug.

[Operator:]

Next question comes from the line of Neil Mehta with Goldman Sachs.

[Neil Mehta:]

The first question I had was around the dividend. And I think, Neil, your comments there was -- this is an imperative for you guys to defend. Can you just talk about the business logic and the financial logic behind defending the dividend, especially in light of some of the dividend reductions we've seen and are likely to be upcoming from your competitors?

[Neil Chapman:]

Yes. I mean we see it this way. And Neil, I'd tell you our capital allocation priorities, as I said in my prepared comments, they're unchanged, and I don't think you'd expect anything different. I always see the 3 legs of a stool. It's a commodity business, so you've got to invest in advantaged projects. You've got to invest in accretive projects. That's the way to sustain a strong foundation and to generate future cash flows. But of course, the business is cyclical. We know that. It's volatile. We all know that. That's the norm, and therefore, it's important to maintain a strong balance sheet. And that's what we've done for years. It enables us to sustain through the commodity cycle. It enabled us to work through this quarter. And that's really, really important. But third, we have a long history in this corporation of providing this reliable, and I would tell you, and as you know, growing dividend for 37 years. A large portion of our shareholder base, I mean, Stephen may correct me, but I think something like 70% of our shareholder base of retail investors.

[Stephen Littleton:]

That's correct.

[Neil Chapman:]

And the investor sets come to view that dividend as a source of stability in their income, and that's something we take really, really seriously. So we manage this capital allocation priorities over a long term. But obviously, it's a balance. And obviously, we recognize the need to balance in the near term to respond to what we've seen in these market conditions and market environment. And that's why we've had the cuts in CapEx and OpEx, and that's why we took on more debt in the last 4 months to a level that we feel is appropriate to provide liquidity, given the uncertainties of the market. But as I said, we don't plan to take on any more debt. We're now developing plans that will able us to maintain those capital allocation priorities over the near term, and that includes sustaining the dividend. And our plans contemplate a price environment that's consistent with third parties. Of course, we look at sensitivities on the upside and the downside of that, and we are aware of what those will be. And that is why we are moving on further reduction of operating expenses and further short-term, short-term reductions in capital expenditure. That will enable us to maintain the dividend, and that will enable us to hold our debt to current levels. Now, Neil, I mean you're well aware, we can't know with certainty how the market will evolve from here. There's too many unknowns, of course. So you have to maintain a degree of flexibility to be able to respond should the recovery not play out as expected. But I -- we feel very confident that we will be able to maintain that level of debt and maintain that dividend, certainly for the coming year or months.

[Neil Mehta:]

Great. And I'm sorry to keep on going back to the capital spending question. I did think that is an incremental point of disclosure, so I just want to clarify some things here. So Neil, are you saying that at the end of the year, your fourth quarter annualized headline CapEx, not cash CapEx, will be $19 billion? And then in 2021, you anticipate you will be below that, all else equal right now? And then can you just talk about the buckets where you could see some downside relative to the plan that you had outlined?

[Neil Chapman:]

Yes. Yes. Well, you are correct. That is what I said. In the fourth quarter, we expect to be at an annual running rate of $19 billion. And what I said was, I expect, I anticipate we'll be lower than that $19 billion in 2021. Of course, we have an annual plan process. That's the way we work in this company. And we ultimately review that plan with our Board of Directors in November, and that will be finalized. And that's why I'm always saying I expect we will do that. We'll finalize the plan ultimately with the directors, and we'll communicate that to you at that time. I think in terms of where we're taking those cuts, clearly, the short cycle in the unconventional space is the way you can turn on capital and turn off capital relatively quickly. And so the quickest cuts and the largest cuts we've made, as we've discussed, has been in the unconventional space, not just in the Permian. I tell you it is across all the unconventional space, and that will continue. In the Downstream and Chemical projects, it's really a question of deferral. So we're not stopping any of these projects. We're deferring them. We're postponing them. And we're working with our partners, and we're working with EPC contractors, and we're working with local authorities. And that is why we've not been specific at this stage which project we're deferring over what period and when. When we have clarity with all of our partners, of course, we will share that with you.

[Operator:]

Next question comes from the line of Doug Terreson with Evercore ISI.

[Douglas Terreson:]

Neil, economic value-added or EVA for ExxonMobil, and really every super major peer has declined steadily during the past decade or so even though we've had a range of commodity prices and margins. And we're now seeing the stocks of the super majors falling to 3- and 4-decade lows versus S&P 500. And on this point, one read could be that companies are investing cyclically or countercyclically, which I think is you all's view despite secular deteriorating -- or deterioration in competitive conditions that is a decline in value creation that we've seen. So two questions. First question is, how do you think about the secular/cyclical risk part and the implications for spending? And then second, with ExxonMobil stock at a 40-year low versus S&P 500, why wouldn't this argue for additional transformation of the company's business structure, financial metrics, executive pay incentives or whatever you think is important? Or do you think that the current plan is sufficient and it will eventually accomplish the objective? So what's the market missing here?

[Neil Chapman:]

We can discuss this for a long time, Doug. So I'll try and be succinct. Look, in terms of how do we think about this business, we don't think the long term has changed. It is a cyclical business. The fundamentals are not -- have not changed. The population will continue to grow. Economies will continue to grow. This relationship between societal progress or you can describe it as human development and energy consumption is absolutely clear, and the demand for energy by all third parties is going to be up 25% by 2040. So we don't see that's changed. And in our business, of course, which is a depletion business, it's not just a question of the growth in demand. It's the depletion as well, which, as you know, demand for crude oil -- and again, I apologize, I don't know these numbers exactly right. It's about 0.7% annual growth, and gas is probably 1.3%, but the depletion is about 6%. So there is a need for hydrocarbons to come into the market and people to invest in hydrocarbons to meet that energy demand. And the winner, the winner will be the company with the strongest portfolio and the company with the strongest operating results. And that's what we've been discussing at our last, however many, 3 investor meetings. And of course, we've talked about and be very, very quick, we've got the strongest set of development opportunities in the Upstream, and we've got the most -- we've got one of the most aggressive divestment programs, and we're driving costs out of the business. In the Downstream, we're not focused on growing fuels, we're focused on upgrading fuels, basically to distillate with diesel jet fuel and base stocks to meet that market demand. And of course in Chemicals, chemical demand, which is growing fast, is driven by this growth in middle class, and we feel very well positioned in that business. So I don't see anything changing. There's no evidence that anything is changing to any of that. I mean that is for sure. In terms of what do we need to do and should we be doing more, I would tell you, Doug, that's what we're focused on. You only win in this commodity business if you have the lowest cost structure, and driving costs out of your business and upgrading your portfolio is what this business is all about. In terms of some of the comments around executive compensation and in terms of workforce reduction, of course, we're looking at every element of that, as you would imagine, when we go through a quarter like that. But I would tell you, we were already looking at all of this, and we started that process as we reorganized this company back in, I guess, 2018 and 2019 with our big changes in organization structure in both the Upstream and Downstream. So I would tell you, in my opinion, we're looking for structural efficiencies to improve this portfolio to be the most competitive in an industry and in a business where we believe the long-term fundamentals are not changed, and we don't see any evidence that changed at this stage.

[Stephen Littleton:]

I guess, Neil, the comment I'd add, as we did the restructuring in the 2 businesses along the value chain construct, what we're able to really identify is the overall cost of delivery of our products. And we're identifying efficiencies across those -- that entire value chain at a rate far higher than we really anticipated, and that's where we're going to start to see additional efficiencies going forward.

[Neil Chapman:]

Yes. Yes, Stephen is right, Doug. And I would tell you that this evaluation that we're going through as part of this year's plan to set up our cost structure for future years, '21 and beyond, we are looking at very significant efficiencies and lower operating expenses. And I know you're going to ask me, "Okay, what is the number?" That is part of our planned process. So we'll share with you at the end of the -- you know what I'm going to say, Doug. But as I said in my comments, we do see the potential for further workforce reductions, including overhead and management positions, but we'll look at that reductions by function, by business, by country, and that will be the basis. We will conclude those plans during the summer months, and we'll review that with the Board in November.

[Douglas Terreson:]

Okay. So it sounds like we'll hear about kind of an updated plan for potential or normalized earnings that you've provided in the past maybe next spring. Is that a good way to think about it?

[Neil Chapman:]

Yes, that would be our intent. Yes, that's exactly right. Exactly right.

[Operator:]

We'll go to Roger Read with Wells Fargo.

[Roger Read:]

Can you hear me?

[Neil Chapman:]

Yes, sure.

[Roger Read:]

I'd like to maybe come at the CapEx question a little different way. Bear with me a second. But as we think about what happened in the post-2014 CapEx cuts, we saw a tremendous amount of improvement in productivity and efficiency and cost reductions just from your contractor/subcontractor universe. Doesn't look like there's the same level of cost cuts that come out on that particular part. So as I think about a CapEx cut from the roughly $30 billion to the sub-$20 billion range, you've mentioned deferrals, but are we going to see a more significant impact on whether it's Exxon or the industry in terms of the ability to bring new oil and gas projects to market as maybe the main result here? I guess what I'm trying to think of is, is this one going to have -- this particular downturn going to have a bigger impact on the industry's deliverability? You kind of touched on that on the intro beyond, just interested in getting your thoughts on that.

[Neil Chapman:]

Yes. Well, I think, look, it is -- when you look across the industry, and we read the same reports that you do, and there's been a dramatic cutback in our industry on capital expenditure. And history says there is a result of that. This is a depletion business. I mean we all know what happens when you don't invest in this business, it certainly suggests that will be the case this time around. But obviously, I can only really talk about what we are doing and why. We're taking these short-term steps while preserving the long-term value. That is our objective. I would tell you that we are working very hard with the contractors, the material suppliers on every angle to drive further efficiencies and costs out. The contracting industry is hungry because there's been so much CapEx taken out of the business, and people have suspended and postponed so many projects. So we're working very, very hard. And I have to tell you, in the Downstream, Chemicals and Upstream, I am -- well, first of all, I'm really pleased how well the EPC contractors are working with us. It is a great -- it illustrates the great partnership we have with them. And jointly, we're taking efficiencies, and we're offsetting the cost of these deferrals with increased efficiencies. That's what I am seeing, and that's what we're seeing in the business. In terms of ability, where the industry stops investing, will that impact the long term of the ability to step up and reinvest again? There's always that chance. But experience in a commodity business suggests that when the demand is there, the market will deliver. I don't see any difference here. I am very optimistic, though, that as a result of not just the oil crash in '15, '16, but what we've seen today will fundamentally, will fundamentally push this industry to do things more efficiently and take structural costs out of construction in a way that we have not previously seen.

[Roger Read:]

Okay. So that's all...

[Neil Chapman:]

I don't know if that answered your question, Roger.

[Roger Read:]

I think so. I mean it's always amazing to me just how much productivity and efficiency comes out of the industry whichever the cycle, but especially in these down cycle moments.

[Neil Chapman:]

Yes. And I would tell you, as a business owner, Roger, it's unbelievably frustrating, right? Because we should gain these efficiencies in the base case. So -- but I agree with you. When times get like this, then it's extraordinary how the industry can find opportunities to do things more efficiently and take more cost out. Sorry, I interrupted your second question.

[Roger Read:]

No, no, that's quite all right. Second question, shifting gears a little bit back to Guyana that Doug mentioned earlier. Between your partner having their call in this call today in a nearby country, there was another discovery in the deeper zones. Your partner talked about some of the deeper zones. I was just wondering how are you looking at that opportunity and how that fits within the sort of greater than $8 billion of discovered resource so far? Where does it fit in the overall package? What did the Yellowtail-2 really tell you about that and some of the other opportunities?

[Neil Chapman:]

Yes. Well, I think you're probably aware, our latest appraisal well, which was on a prospect we call Yellowtail-2 and we discovered 2. I would tell you that additional high-quality, hydrocarbon-bearing reservoirs, and that it's very positive for us, and it's very positive for the country and our partners. One was adjacent to Yellowtail and one was below Yellowtail. So that further gives us great confidence and it's more learnings in terms of the potential at lower depths or deeper depths. We're now on a prospect called Redtail. I would anticipate we'll get some initial results in August on Redtail. We're going to move into the Kaieteur Block in August on a prospect called Canje. And of course, subsequent to that, we've got other exploration projects that we're drilling up in later this year, one in Hassa-1 and one in Bulletwood, which is on the Canje Block. If my memory is correct, those are what we're doing. In terms of Suriname, I think you're aware, we're in Block 59 down there, and we're in Block 52 with our partner, Petronas. And we're looking to drill a well on Block 52 with our partner potentially in the fourth quarter of this year. I think the learnings and the understanding of the whole resource base in that offshore areas, Suriname and Guyana, the more we find and the more we drill, the more we understand about that hole prospects. But I would tell you that everything we've seen this year is consistent with what we've been talking about. And we are very encouraged and very excited by the prospects going forward.

[Operator:]

Next, we'll go to Sam Margolin with Wolfe Research.

[Sam Margolin:]

So belabor the CapEx topic, but something that I think we landed on that's pretty important, especially for investors. In the past, the process of budgeting CapEx was never explicitly tied to your expected sources of cash. And actually, as a matter of fact, the management committee would make it very clear that they were completely decoupled all the time and that just wasn't the right way to run the business. And so I mean do you think it's a fair interpretation of your comments to say that there's a real fundamental change in the way and that the sort of cash include disposals and other nonoperating factors are now a prominent part of that process, and we should think about it that way? Or is this just a unique circumstance to the moment?

[Neil Chapman:]

No, I don't think it's a fair way of characterizing it. I mean in the short term, we have elected to do the following. We've elected to take no more debt on because we want to protect the strength of our balance sheet. We want to and we feel a great commitment to our dividend. And so what other knob do you turn when you're in that situation? It's capital expenditure. I see this as a short-term reduction in capital expenditure to manage the current situation. We retain a very competitive balance sheet. I mean you know that. You've seen this. It's very competitive versus our peers, and we want to protect that, and so we're doing that by taking shortcuts and expenses. It doesn't change our fundamental belief that you need a strong balance sheet and you need to invest in the most attractive prospects, the most competitive prospects that are out there. So again, Sam, I don't think it's a fundamental change. I think it's a response to the short-term environment.

[Sam Margolin:]

Okay. And I apologize for belaboring that. I just wanted to clarify. And then on a related note, within this process of high grading for the near term, the focus is to be on Permian, and it seems like the LNG projects may have LNG sort of tied to some other goals for the company .

[Neil Chapman:]

Yes. Yes, Sam, we kind of lost you there, but I'm going to say -- I'm going to try and interpret what I heard. It was around LNG and the LNG projects, and you're aware that we have 2 significant opportunities in Mozambique and in Papua New Guinea. I think we're continuing in Papua New Guinea to work with the government on the P'nyang fiscals, and that process is ongoing. We're continuing to work with our partners in Mozambique, both the government and our partners on the timing. I think consistent with what you see in our capital spending and consistent with what you see across the industry, there could be a time component in terms of a delay. You will recall that both those 2 projects, even in 2018, we were talking about them coming online in the '25 -- 2025 type of period. There is a chance that will slip a few years or a little bit of time beyond that. Yes. Sorry, Sam, we lost it. If that wasn't the question you were looking for, that's what I heard.

[Sam Margolin:]

No, I was going to ask if you could tie to in some of the ESG efforts as well. But if I have bad connection, I'll leave it there and ask Stephen later.

[Operator:]

Next, we'll go to Phil Gresh with JPMorgan.

[Philip Gresh:]

I guess I'm going to also -- I'm going to ask another follow-up, I suppose, on this topic. But as we look at the current cash balances for the company and your CapEx plans, is there a minimum level of cash that you're, I guess, basing your commentary on that you would not plan to be adding additional debt? And is there anything in there or inorganically and plan around asset sales? Or is that commentary completely organic in nature? And I guess the bigger picture question is, you're talking a lot about efficiency improvements and lowering costs. So structurally, the $30 billion to $35 billion in CapEx you've talked about, is that something that through efficiency gains and things you believe actually would be lower in the future?

[Neil Chapman:]

Yes. Let me try and address them in order. Asset sales, I mean, but it's not the best environment for selling assets, but I can assure you that we are in the market with multiple assets, and we're progressing asset sales. Whether they will finalize or come to fruition, time will tell. But I think it all depends on what you're selling, what market, what location, what's the age of the asset, et cetera. And so we are extremely active in that space. But I never like to try and predict what will happen in the future of that because it depends on both the buyer and the seller. So -- but we're still progressing. In terms of cost savings, as I mentioned earlier on and how that impacts CapEx, I'm optimistic that when times get really tough for everybody in that supply chain of project development and project execution, you identify and drive new efficiencies. So you would hope that they can be retained, and you would hope -- and we certainly plan that we'll benefit from those in the long term. Will it change our capital expenditure from $33 billion, which was our original plan for this year, down to $23 million just through savings? I think that's probably a little bit optimistic, frankly. But we do see savings coming out, and we do see savings coming for the long term. In terms of the cash balance, what we did was we took on more long-term debt over the last 4 months at what we regard is attractive -- certainly relatively attractive prices, but that was to provide more flexibility during this period. And when you're in a volatile period, higher cash is what we wanted to do. And of course, it provides the optionality to reduce short-term debt. But that's all part of our debt management, cash management, capital allocation process.

[Stephen Littleton:]

I guess, Neil, I'd also add, currently, Phil, we have a pretty high cash level given the amount of uncertainty that's out in the market. But if you go back in time, we've historically carried a cash balance in the $5 billion or lower. And so right now, obviously, we're in an unprecedented time, we thought it was appropriate to -- we had the appropriate level of liquidity to manage us through the next couple of quarters just to make sure we see how the recovery is going to respond. But I look back on our history, usually, that cash balance is substantially lower.

[Neil Chapman:]

Yes.

[Philip Gresh:]

Okay. Follow-up question, I suppose it's somewhat related to what Doug Leggate was asking about with respect to sustaining capital. It's just more specific to the Permian. As we look at the exit rate that you're talking about for the rig count and implicitly for capital spending, I think your guidance for this year of 345,000 on production would obviously imply something a bit higher than that as an exit. But are you -- I guess with this $19 billion or less of spending, would that -- should that imply to us that you would let Permian production decline in 2021? Or do you feel that there are levers available to you that, that would not be embedded in that plan?

[Neil Chapman:]

Yes. I would tell you, let's talk about Permian this year first. Our outlook for this year is pretty close to what I said at Investor Day. I think it's -- again, you'll correct me here, but it's 345,000 Kbd, and so that's about just 15,000 below. And that really reflects, because of the way we are developing the Permian with these large-scale developments and large cube developments. The capital you invest last year has a material impact on the results this year. And so that's why it's only a 15,000 Kbd reduction. In terms of the following year, we haven't finalized those plans yet. Of course, if there's no investment, these wells decline rapidly. But you're aware that we have a considerable number of DUCs sitting out there. You'll also be aware, it's a much higher cost of frac than it is to drill. And that's really, really important. So just looking at drilling rigs alone doesn't tell you the full story. I don't anticipate that our volumes will reduce next year. We'll finalize that through the plan process. We'll finalize that with our Board in November. And of course, we'll share that with you at the Investor Day in the first quarter next year.

[Stephen Littleton:]

And Neil, if you don't mind, I'll add, I think, Phil, it will also depend on what's the business environment look like, and that's the beauty of the Permian. We'll be able to flex up or down depending on what we see in terms of the market.

[Neil Chapman:]

Yes.

[Philip Gresh:]

Okay. So on the $19 billion, your base case would be -- it would not decline. Is that the conclusion?

[Neil Chapman:]

Certainly, at a $19 billion capital spending, it would not decline, no.

[Operator:]

Next, we will go to Jason Gammel with Jefferies.

[Jason Gammel:]

While we're on the topic of the Permian, I was hoping that you might be able to address, Neil, what you're seeing on the performance from wells that had been curtailed but are not being brought back online. Are you saying pretty flush production from those wells?

[Neil Chapman:]

Yes. Actually, it's something we looked at very closely when we shut in these wells. We wanted to be sure that when we bring them back online that they come back at what I always describe as the same position on the type curve, and that's indeed what we've seen. We were confident that if we shut in, we'd resume at or above where it left on that decline curve. And Jason, that's what we're seeing.

[Jason Gammel:]

Excellent. Maybe if I could just shift over to the Downstream. You talked about the margin environment still being pretty poor. How are you able to, given the flexibility of your system, shift around product yields? And I'm taking really integration to petrochemicals and being able to more maximize feed into that system and away from fuels. And then also, how are you dealing with jet fuel, just given the significant inventories and lead demand for that product?

[Neil Chapman:]

Yes. I think, Jason, you have to start with jet fuel, frankly, because of all transportation fuels, jet is obviously lagging the most. From our perspective, it's very clear that's because of the lower international flights. That's the biggest issue. When you produce jet, what are you going to do with it? You've got to push as much jet as you can into the distillate pool, into the diesel pool. And actually, the demand for diesel is quite strong, but the margins are still relatively low, and that's because the refiners are pushing jet in up to the limits of the product quality, pushing jet in there, which is giving, if you like, an oversupply into that jet pool. It is interesting on the diesel or distillate demand. And just throw a little bit of data, we see U.S. truck vehicle miles back to the pre-COVID levels. That is a really significant point. And so once you see commercial transportation going back to those pre-COVID levels, that is important. But of course, we see passenger vehicles lagging and jet lagging a lot. In terms of Chemicals, Chemicals is a really interesting story in terms of what's happening in the demand for chemicals. It's very different depending on the products that you're making. If you are making products that's going into the packaging or medical industry, so think things like polyethylene, the demand is very, very strong. And actually, polyethylene demand is up 2% year-to-date. But not all polyethylenes are the same. Some go into packaging and some go into durables and construction, so think of things like pipe, construction pipe in your houses. So it's very, very different. Overall, we see strong demand for products that are going into packaging, medical; weaker demand for products that go into auto and construction. And that's important because it depends what feedstock you put into your steam crackers to make the right products. Of course, over the last quarter, we saw a contraction of the feed advantage between whether you're cracking ethane, which of course is gas, or you're cracking naphtha. There was little differentiation in the second quarter between those feedstocks. And at that time, refiners were putting more and more liquids into their feedstocks. Certainly, from a U.S. perspective, as this quarter has evolved in the last month or 1.5 months, what you've seen is the advantage for gas, i.e., ethane in the U.S. chemical plants, that advantage has started to open up again, which means more chemical producers are putting more gas in the feedstock of their chemical plants, which means they're backing out naphtha. That's really what's happening.

[Operator:]

We'll take that from Ryan Todd with Simmons Energy.

[Ryan Todd:]

Great. Maybe just a couple of quick ones on the downstream. Could you provide some color around the time line for the Beaumont expansion and whether that will be impacted from the timing point of view in terms of what your eventual outlook is for Permian production over the coming years?

[Neil Chapman:]

Yes. I would tell you, Ryan, as I mentioned earlier on, we're still working with our partners and our EPC contractors in terms of which of these Downstream projects that we are postponing, how long that postponement will be. And we're just not in a position yet to communicate that externally, not because we haven't fund our plans, we're still working with our contractors on that. So in due course, we will give you some further details or more details on that. What I would tell you is there's likely to be a postponement on that, the magnitude of that postponement on that project, and we'll come back to you later on, whether it's months or longer than that.

[Stephen Littleton:]

Neil, if you don't mind, I'd probably add to the fact that if you think about what we're doing at Beaumont, it's really all connected back to what's going on in the Permian. So being able to sync those up is going to be pretty critical longer term.

[Neil Chapman:]

Yes, it is. It is. Sure.

[Ryan Todd:]

Okay. And then maybe one final one. I mean we've seen -- over the last couple of quarters, we've seen pretty significant impairments from a number of your peers regarding both -- driven by both kind of short-term and long-term pricing assumptions as well as some certain assumptions on carbon transition. I mean can you talk a little bit about where you are in the process of revisiting some of those long-term assumptions? If anything, and in particular, where the oil sands have been hit pretty hard a number of your peers, where the oil sands kind of falls in terms of your long-term views regarding this?

[Neil Chapman:]

Yes. Yes. No, I appreciate you asking that question. Thank you. Thank you, Ryan. I always start with impairment saying it's really quite difficult to compare between companies on write-offs and impairment. It depends on the quality of the resource. It depends on the carrying costs. It depends on your price margins assumptions. It depends on your development plans. And you also have to put this context on this. There are different accounting rules, as I think you're aware. In Europe, IFRS goes straight to a discounted cash flow. GAAP rules are an undiscounted cash flow. So those are two very significant points, and I would just offer that as background. For us, in addition to our normal monitoring for impairments throughout the year, we follow a very rigorous process each year following those GAAP accounting rules. It is part of our annual plan process. During that process, we refresh our views for long-term demand and supply and industry conditions each year. We look at that supply outlook. We look at the cost of supply for oil and gas. That drives the supply/demand outlook. That informs our view on prices. And as I've said previously, and we have said previously, our prices are generally within the range of third-party assessments. We are going through that work now on pricing, and we have not finished that work. When we have finished that work, we will review it with our Board, of course. But again, as we have seen previously, what we're seeing so far, it is in line with third-party assessments. As part of that process and as part of that plan process, we look at the development plans for all of our resource base, and that would, of course, include oil sands. And the key part here is when we plan to develop each resource. And when we've completed that work, if changes to our long-term views on prices or if changes to our development plans are sufficient, then we'll follow the normal test for impairment. And that's the process we follow. We're following that process this year, and that process will be finalized with a Board review in November. Does that answer your question?

[Ryan Todd:]

Yes.

[Neil Chapman:]

Okay.

[Stephen Littleton:]

Well, we want to thank you for your time and thoughtful questions this morning. We appreciate you allowing us the opportunity to highlight second quarter results and the decisive actions we are taking to manage through these challenging times and position ourselves for the eventual recovery. We appreciate your interest, and hope you enjoy the rest of your day. Thank you, and please be safe.

[Neil Chapman:]

Thanks, everyone.

[Operator:]

That does conclude today's conference. We thank everyone again for their participation.