Chevron Corporation (CVX) Q3 2011 Earnings Report, Transcript and Summary

Good morning. My name is Sean, and I will be your conference facilitator today. Welcome to Chevron's Third Quarter 2011 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I will now turn the call over to the Vice President of -- the Vice President and Chief Financial Officer for Chevron Corporation, Ms. Pat Yarrington. Please go ahead.

Thank you, Sean. Welcome to Chevron's Third Quarter Earning's Conference Call and Webcast. On the call with me today are Mike Wirth, Executive Vice President of Downstream and Chemicals; and Jeanette Ourada, General Manager, Investor Relations. Our focus today is on Chevron's financial and operating results for the third quarter of 2011. We'll refer to the slides that are available on Chevron's website. Before we get started, please be reminded that this presentation contains estimates, projections and other forward-looking statements. We ask that you review the cautionary statement shown on Slide 2. Slide 3 provides an overview of our financial performance. The company's third quarter earnings were $7.8 billion or $3.92 per diluted share. Earnings in the third quarter 2011 were more than twice that of third quarter 2010. Upstream benefited from higher crude oil prices, and Downstream benefited from gains on asset sales and improved margins. Return on capital employed for the trailing 12 months exceeded 22%. Our debt ratio at the end of September was 7.5%. This is lower than previous quarters due to the early and economic redemption of a $1.5 billion Chevron Corporation bond. In the third quarter, we repurchased $1.25 billion of our shares. In the fourth quarter, we expect to repurchase the same amount. Of particular note, we announced Wednesday that Chevron's Board of Directors approved a $0.03 per share or 3.8% increase in the quarterly common stock dividend. Our Board took the unusual step to authorize a second dividend increase this year because of the company's strong performance and financial position, as well as their confidence in the company's future cash-generating capabilities. Chevron has a long history of annual dividend increases, 24 consecutive years. The 2 dividend actions in 2011 resulted in annual quarterly dividend increase of 12.5%, which is consistent with our priority of delivering long-term dividend growth to our shareholders. Turning to Slide 4. Cash generation from operations was $11.5 billion during the third quarter. This is, yet again, a new quarterly record for the company and has resulted from continued strong operational performance. Asset sales during the quarter, which included the Pembroke Refinery, generated about $2 billion in proceeds. Year-to-date, cash generated from operations was $32 billion, reflecting the strong cash-generating power of our recent investments and of our base business. This strong cash flow allows us to both reinvest in the top-tier project queue, as well as reward our shareholders with meaningful dividend growth and a sustainable share repurchase program. At quarter end, our cash balances totaled over $20 billion, up $3.3 billion year-to-date. This puts us in a net cash position of $10.6 billion. Jeanette will now take us through the quarterly comparisons.

Thanks, Pat. Turning to Slide 5. I'll compare results of the third quarter 2011 with the second quarter 2011. As a reminder, our earnings release compares third quarter 2011 with the same quarter a year ago. Third quarter earnings were $7.8 billion, slightly higher than second quarter earnings. Starting on the left side of the chart, Upstream earnings were down $670 million, driven by lower crude oil realizations and lower volumes, partly offset by favorable foreign exchange effects. Downstream results increased $942 million between quarters, benefiting from gains on asset sales, favorable foreign exchange effects and improved international margins. The variance in the Other bar reflects the unfavorable swing in corporate tax items. On Slide 6, our U.S. Upstream earnings for the third quarter were $442 million lower than the second quarter's results. Combined crude oil and natural gas realizations reduced earnings by $190 million. Chevron's average U.S. crude oil realizations decreased 7% between consecutive quarters, slightly higher than the 5% drop and posted Midway Sunset and LLS spot prices. Natural gas realizations also dropped, decreasing 5% between quarters, in line with average Henry Hub spot prices. Between quarters, sales volumes decreased 32,000 barrels oil equivalent per day, decreasing earnings by $105 million. The Other bar is comprised of a number of unrelated items, including the absence of gains on several small asset sales during the second quarter. Turning to Slide 7. International Upstream earnings were down $228 million compared with the second quarter. Lower realizations decreased earnings by $225 million. Unit realizations for liquids decreased about 4%, in line with the decrease in average Brent spot prices. Natural gas realizations were relatively flat between periods, but benefited earnings by about $45 million due to sales mix. Lower liftings across multiple countries decreased earnings by $250 million. Between consecutive quarters,…

Thanks, Jeanette. I'm pleased to have an opportunity to update everyone on our Downstream performance. We continue to focus on improving returns through a relentless commitment to operating safely and reliably, and driving improvements through all our business operations. Please turn to Slide 14. I'd like to start with an update in the area of reliability where we now have 2010 Solomon data. This comprehensive biannual third-party benchmarking survey shows that Chevron ranked #1 among major competitors in refinery utilization for the third consecutive period. Reliable operations are the foundation of competitiveness, and the reduction of unplanned shutdowns enabled us to capture maximum value from our installed capacity. I've talked to you for years now about our commitment to reliability, and this independent assessment shows the results of that commitment. I'm extremely proud of this outcome, as it demonstrates our sustained leadership in an essential measure of operational excellence. Year-to-date 2011, we've delivered utilization rates at close to 2010 levels, and our people are focused on continuing to sustain this level of performance. Please turn to Slide 15. In March, I updated you on the progress of our organizational restructuring to lower our costs. At that time, we delivered a reduction in headcount of some 20% versus a year-end 2008 baseline, largely through work simplification and streamlining. As of the end of the third quarter, we now stand at a reduction of 34% or 6,300 people, mostly outside of the U.S. This continued progress reflects portfolio rationalization and our significant efforts to keep our cost structure lean and competitive. On the right-hand side of this chart, you see an update of our commitment to improve refining performance by $700 million by the end of next year. More than a year ahead of schedule, we have exceeded our target and captured…

Okay. Thanks, Mike. Now turning to Slide 19. I'd like to close out with a few highlights of Chevron's strategic progress during the quarter. Mike just covered our Downstream progress. Clearly, our plans to improve the competitiveness of our Downstream operations are well on track. Let me cover some of the highlights on Upstream now. Most recently, we achieved first production at Platong II in the Gulf of Thailand. This natural gas project is expected to ramp up to 330 million cubic feet per day, and it will also produce about 18,000 barrels per day of natural gas liquids. We made Final Investment Decisions on a number of major capital projects this quarter. In Australia, we sanctioned the Wheatstone LNG project, which along with the Gorgon project, positions us to be one of the world's leading LNG suppliers. Project cost estimates for Wheatstone is $29 billion. It is a 2-train, 8.9 million-ton per year LNG facility and a domestic gas plant. We currently have about 60% of our equity LNG under long-term sales agreements. In the North Sea, the second phase of the Clair Ridge development received the green light. This project is expected to cost $7.1 billion and will extend peak production and increased recovery from the Clair Ridge field. We also sanctioned the Tubular Bells project in the Deepwater Gulf of Mexico. First production from this $2.3 billion oil & gas development is expected in 2014, with peak production at 40,000 to 45,000 barrels per day oil equivalent. Our exploration activities have accelerated throughout the year. In the Deepwater Gulf of Mexico, we recently announced the Moccasin oil discovery and spud our Coronado well. We also spud a pre-salt well in Angola. And in offshore China, we have just begun drilling our first well in the Deepwater Pearl…

[Operator Instructions] Our first question comes from Ed Westlake with Crédit Suisse.

Very strong cash flow again this quarter. Just a quick question. If you've taken FID on Wheatstone and Tubular Bells, I mean, people out there do question the returns on perhaps the initial phases of Wheatstone and the Tubular Bells project. Clearly, Wheatstone's more strategic. But, I mean, what would you say that the people might be missing when you think about the returns for both of those projects?

I think actually, both of the projects are strongly economic. I mean, we did mention the strategic aspect around Wheatstone, and there's a prospect of brownfield expansion beyond the initial commitments that we have made. We continue to be very successful in the Australian Basin in finding gas. I think we've announced 11 discoveries over the last couple of years. So obviously, it's a very prolific basin. So that will have strong returns for a very long time to come. At the same time, the Gulf of Mexico is a strategic basin for us as well, and the economics on Tubular Bells look strong. They're competitive in our portfolio.

And maybe specifically on Wheatstone, obviously, $29 billion total CapEx. How quickly are you going to be able to get spend going into, say, 2012?

I think that our project team was waiting for the Final Investment Decision to be made, and they are very anxious and ready, and in fact, are ramping up as we speak, Ed. So I would expect there to be a significant ramp-up there in 2012 for Wheatstone.

Our next question comes from Paul Cheng with Barclays Capital.

A couple of questions. First for RNM [ph] my -- other than say, the pending sales in Spain, Africa and Caribbean, you're largely done with the portfolio restructuring or do you still have significant more to go? And also, if you can give a comment about Richmond, whether that we're going to see any progress on the upgrading there? And then also that with the Eagle Ford the increasing NGL and the condensate production, have you guys looked at whether it you makes sense in Pascagoula or some of your facility adding a condensate splitter to take advantage on that?

Okay, Paul. I'll take those in order. First of all, on the portfolio, we've tried to lay out for you on an annual basis the large portfolio actions that are underway or the clusters of geographies. And as I mentioned Spain and a little bit of Africa still is pending, with some deals signed and yet to close. We're negotiating on businesses in the Caribbean, still, Puerto Rico, the Dominican Republic, a number of the other islands in the Caribbean and would expect to have deals on those signed before the end of this year and close next year. Beyond that, we'll always continue to review our portfolio for competitiveness, but I think the big work will be complete in 2012. And if we've got any other things that we anticipate doing here in the near term, you'll probably hear about them in March. But we're winding this down towards the portfolio that we really believe is right for us and will allow us to deliver sustained, very competitive returns. On Richmond, you know the history, so I won't reprise that. We continue to be committed to investing under the right circumstances in a project there. In May of this year, we submitted an application to the City of Richmond restarting the environmental review process and taking clear note of the deficiencies in the prior process that were noted by the judge in the lawsuit. We've scaled it back. We initially had a significantly larger set of projects that we were undertaking and moving through the permitting process. Other revised project will only complete the replacement of very old hydrogen plant equipments and give us the ability to use that hydrogen, both on site at the refinery and to export some of it to other users. We have removed the…

Our next question comes from Doug Leggate with Bank of America Merrill Lynch.

Pat, if I can take my full course of 2 hopefully quick ones. First of all, I appreciate the update from Jeanette on timing and/or at least on capital I should say on the production outlook. However, can you reiterate or reaffirm the timing on Gorgon, because we're hearing chatter of Australia that things might have slipped behind schedule, both on a budget and on a timing basis, if you could reaffirm that? And my quick follow-up I guess, taking advantage of Mike, being on the line here. Mike, it looks like, at least on our model, when we look at top tier rates on the International business and particularly in the U.S. business, that based relative to your indicator margins, things seem to have kind of deteriorated a little bit versus what you were able to capture obviously from same assets. I'm just wondering if something has changed notably there that you can share with us, and I'll leave it at that.

Okay. I'll take the first one there on Gorgon. We are reaffirming our timing of Gorgon, which would include production, first production at the end of 2014. I think we've been pretty transparent about some of the weather-related delays that we had initially on when 8 cyclones went through before we had much of the site prep work done. That has been resolved. We've now got the housing facilities that are cyclone-proof. So should there be bad weather again, we won't have to demobilize people on and off and remobilize people on and off the island. We've actually make tremendous progress over the last several months. The materials offloading facility is ready for service. That will make the logistics moving quite easy. I mentioned the housing is really already 80% of it's there and occupied. We've got the tankage being built, we have the wells being drilled. So there's really tremendous progress that's being made on Gorgon. And to the extent that you hear some chatter about scheduled slippage, as you know, we continue -- there are critical path items and noncritical path items on any major project schedule, and we feel very secure that our critical path items are right on plan.

Doug, on the question on capture rates, I don't know exactly what your model is showing you. In the third quarter, we had a very good quarter. In fact, in the U.S., you saw some significant margin deterioration. The West Coast refining margins were off by $3 a barrel or more, when we saw some reductions on the Gulf Coast as well. Actually, West Coast was down 5 and the Gulf Coast was down 3. We were actually able to capture that back and claw it back. And likewise, internationally, we ran pretty well. Earlier in the year, and so if you're looking at year-to-date, we did have some issues in the first and particularly the second quarter with some extended turnarounds at one of our facilities in the fire and another one that took a crude generator offline for a while that had us running slightly different than we normally would in selling out intermediates and buying intermediates, which is some things that can chew into your margins, while you're operating like that. So earlier in the year, we did have some challenges. But in the third quarter, we did well and there's nothing material that's changed in terms of our ability to continue to be competitive in that regard.

Our next question comes from Jason Gammel with Macquarie Capital.

First of all, I wanted to ask a question about Australia with the incremental exploration success patent. If you could update us on what you think the resource base that you have captured in Australia is and sort of contrast that with what I imagine to be about 23 TCFs you'd need to back up the 2 projects that are currently under construction or at least approved. And then a very specific one for Mike. Mike, you had mentioned a couple of years ago a technology that you were piloting in Pascagoula was a vacuum-resid, hydro-cracking process with near 100% clean product yield. How is that process going? Is that something that you think could be commercialized?

Okay. First one on Gorgon. Actually, Jason, I wish I had a slide in front of me that I'd just refer you back to. George showed a slide at our Security Analyst Meeting back in March where he talked to the incremental gas quantities being found and the points in time, over time, when we have sanctioned these various projects. And what you continue to see is that we continue to find additional resources, both that can support an additional Train 4 around Gorgon and then also potentially supporting additional trains around Wheatstone. So we don't -- I don't have any incrementally new number to advise you of that. I'd suggest that you go back and pull out that slide and know that we have continued to have major success since March. And that George, I'm sure, will update you in March with some rendition of that slide. But obviously, it's a very prolific gas basin, and we're very encouraged about the exploration success that we continue to have.

And Jason, on the technology that we talked about a few years back, we continue to mature that in a pilot plants and to very good results. We looked very hard at a couple of different locations at a precommercial plant that would run at a few thousand barrels a day, and prove it up so that we could scale it up. The capital costs on that were pretty significant. And at a time when we've got a lot of other value-creating capital opportunities in our queue, and the questions today have been about a number of those, we are prioritizing our activity, and this one really at the scale it would take for us to answer the next set of questions, as we manage our way through capital spend, it just doesn't stack up. So we've got the technology, we've got it well covered with IP protection, and we'll maintain it. But at this point, we have chosen not to proceed to the next step of scale up on that.

Our next question comes from John Herrlin with Société Générale.

Two quick ones. With Angola, will that be a fourth quarter TD or first quarter on the pre-salt well?

I don't know. I mean, it just started drilling. So I don't think you're talking about a fourth quarter outcome here. I think you're really talking much, much into or early into 2012.

Okay. That's fine. With Wheatstone, Pat, can you address what your reserve bookings might be? I mean, initially you started out with a small amount for projects that are sanctioned offshore. I was wondering if you were willing to give an order of magnitude.

I'm not willing to give an order of magnitude. We'll do that obviously with our year-end reports. But having sanctioned Wheatstone and the fact that it is an LNG project will mean that you should see a sizable reserve booking this year.

Our next question comes from Evan Calio with Morgan Stanley.

I'll give you 2 questions, one Downstream and one on exploration. A question for Mike on your near-term refining outlook. A good quarter, good Downstream quarter, by the way. As I look at the European inventory, both diesel and crude at 7- and 5-year lows U.S. day cover 5 lows, steep backwardation in the product market. I was wondering what your perspective was in the near-term distillate markets, as well as what you're seeing in Asia where there's, frankly, inventory and demand data are a little less transparent. And on the Japan cargo side, if we could give comments there the last time you were on the call as well.

Okay. So I'll take that one, and we'll take your follow-up question. Yes, so right now, sentiment seems to swing. We had some optimism about the announcements out of Europe earlier this week, but I think overall in the OECD, the demand side and the overall economic situation continues to be problematic. And so, there is some risk. Now you've gone to the part of the barrel where things look better, which is distillate. Japanese diesel demand looks to be up pretty sharply. We saw -- we've seen a strong draw in stocks in Japan in October. There's some talk, and you're right in China, things are less transparent. But some talk that diesel maybe a little bit on the short end there right now. And certainly, as you look at the data here for the U.S., the implied diesel demand, including exports, which have become a regular part of the mix here, it's above the 5-year average. We're well into the harvest season and moving into cooler weather. So there's a number of supportive factors for distillate demands right now. And the spreads reflect that, if you look at the NYMEX right now, diesel, this commands quite a healthy premium to gasoline. Gasoline markets look weak right now, high prices. Demand has been struggling to stay within range of what we saw a year ago here in the U.S. And so, the gasoline part of the barrel continues to be pretty week. I think in Asia, it's a mix, as always. There's a quote from Lee Kuan Yew that Asians are a figment of the Western imagination. I think in places like China and Singapore, it look very, very strong. And Thailand and the Philippines right now are really struggling with weather. And the impact of the floods in Thailand and a couple of typhoons that took a pretty direct shot at the large demand centers in the Philippines, and then there's other parts of Asia like Japan, where demand continues to be pretty weak. So overall, I think China remains the big story, and I think distillate is the part of the barrel that we continue to see the strength in.

Great. That's great. My follow-up question is on exploration. I know that [indiscernible] and Block 0's been very prolific for Chevron. You kind of highlight the pre-salt well, and I think you drilled through that salt before to -- I think it's been less uniform. As you're highlighting that well, I presume it's a material well. I just wondered if you could -- is there something different or more perspective here, and then update on Liberia spud date, maybe Bear's Hump as well.

Yes, Evan, there's not really much more I can offer on the Angola well. I mean, we'll just have to wait and see how that comes out. The Liberia spud date is later here in the fourth quarter. And that again, in 3 large blocks, it's the first well, highly perspective, or we hope it will be a highly perspective area. And Bear’s Hump, the same kind of thing. Bear’s Hump is still drilling, and we'll have to wait and see what the outcome there is. That's Gulf of Mexico deep gas, and we'll just have to wait and see.

Our next question comes from Mark Gilman with The Benchmark Company.

Mike, I got one for you relating to some of Jeanette's comments. In discussing the U.S. Downstream in the third quarter, she referenced a very, very sizable impact associated with, I think, she termed it a more economic crude slate. If you do the math on those numbers, that's a big figure on a per-barrel basis. Could you talk about what that's about and the sustainability of it? And in particular the extent to which it's associated with market factors as opposed to specific Chevron initiatives, and then I have a follow-up.

Okay. So the thing that I think you ought to pay attention to in there is that it's a 2Q-to-3Q comparison, number one. Number two, it reflects some of the challenges I referenced earlier in that earlier in the year, we had some refineries that had some issues. So we had a fire at the Pascagoula, one of our crude units at Pascagoula, and in the second quarter, and so we were offline there, buying higher-priced intermediates and to keep the back-end conversion units full, we had some problems at El Segundo in the second quarter as well. In the third quarter, by contrast, everything ran extraordinarily well, and we had virtually no unanticipated issues to face. And we were able to optimize some spreads that had opened up in the market. We also have a couple of our refineries, they're smaller, Burnaby and Hawaii, that purchase a fair amount of their feedstock priced off of WTI. And while we don't have the big WTI exposure that some of the larger Mid-Continent refiners do, that's been a nontrivial factor for those refineries as well. So you have a number of issues, some of them market-related, some of them operations-related and some of them Chevron related, all of which moved significantly to the positive in Q3, a number of which were either not nearly as strong in Q2 or, given the operational challenges, actually negatives in Q2. So without trying to take you down into a detailed breakdown on that, Mark, I would tell you that you shouldn't bank on all of that as being kind of a sustainable kind of a way to beat the market. But there's certainly a chunk of that, that I think is.

Pat, you've been in the global LNG selling/contracting business for a while. I was wondering if you could just comment on the kind of trends you're seeing in the more recent LNG contracts in terms of such features as the slope, S-curve aspects and anything else you might want to comment on in terms of how that market is looking.

Actually, I mean, what we're seeing, frankly, is I would call it a strengthening of the midterm LNG market, really with fallout from the Fukushima circumstance. And so I would say in the medium term, it's been a stronger market. So I think you can get an indication of what the various slopes have been from various publications. I don't want to go into specifics there, but I think the contracts, we're not working on it, off of the curve interpretation, and we feel very comfortable about where we stood commercially. We have additional volumes that we can still place with Wheatstone and Gorgon, frankly, and we are in discussions with numerous buyers on that. And we feel very optimistic about our ability to find quality buyers at very good commercial terms.

Our next question comes from Blake Fernandez with Howard Weil.

I had 2 quick ones for you. One, I wanted to clarify the production comments. If I'm not mistaken, the guidance last quarter was for full year volumes of 2.7 million, 3 million barrels per day. And if I heard the correct number for ramp up in 4Q of 100 to 150, it seems like you may come in a bit light according to my arithmetic. I'm just trying to confirm, is that the case?

I think that's a fair assessment, yes.

Okay. And then secondly, as we kind of look ahead to CapEx, I realize you'll be giving some details in December, but in our efforts to try and quantify what that could be, when we look at Wheatstone, your 73% working interest I believe.

Yes.

Can you give us any clue for where you expect that number to ultimately land? Or are you maintaining that level?

You mean, in terms of our equity ownership?

Correct.

Yes. I mean, we do anticipate a further sell down here. That's our expectation, yes.

Is there a targeted percentage level that we should be thinking about, maybe?

You mean in terms of our overall ownership?

Yes, right. How low do you want to get?

I think that really depends on commercial discussions that are underway here. And I think having a proportionality in a 70%-ish range works well for us. I don't want to get any more specific than that, I think.

Our next question comes from Iain Reid with Jefferies.

I got a couple of questions for Mike, actually. Kind of firstly, just sort of a big picture one on the Downstream, Mike. If you kind of step back to 2009 and look at where you've come in terms of improvements in your Downstream earnings, if you split that between the portfolio actions you've done in cost reduction and kind of new investment, how would that improvement kind of break down? I'm also interested in about how you see in kind of a constant margin environment that's improving in the future?

So that's something in March that I'll update everybody on, because we laid out some pretty specific targets against our 2009 performance, and I just don't have a breakdown in front of me right now. I would tell you from a big-picture standpoint, we've certainly seen margins better than what we experienced in 2009. So a portion of what you've seen in the Downstream is due to improved fundamentals out there in the marketplace. But we have made sizable cost reductions. I spoke to you a third reduction in headcount. We have reduced our positions in a lot of countries around the world where, frankly, we worked hard to not take a lot home. And we're coring up into the areas where we really have competitive strength. So the cost side of it in the portfolio side had been very important. The other part is reliability, and I talked to you about our utilization rates. And we are running our assets extremely well and better than our competitors are. And you take whatever the market has to offer you. And if you can continue to run reliably, you can be very, very competitive. So there are contributions from the market that are nontrivial, but there's a big, big piece of self-help that I'll talk about when we're back in New York again in March. I just don't have a specific breakdown for you this morning. I do think that the self-help piece is intended to be sustainable. And in the Downstream, it's a margin business. The competition is tough, and hanging on to the improvement is always a challenge, which is why we continually reset targets to get even better. And I made reference to that today in our refining system.

Okay. My second question's about [indiscernible] I just wonder whether you've got any concerns about the new kind of co-owner, which you're going to have there some time in next year. And whether there's any plans for any change into the way the joint venture is set up?

This joint venture's been very successful over the decade that it's been in place and Philips and then ConocoPhillips has been a very good partner, and we've been well-aligned. I think that they've indicated they intend this to go to their Downstream company. The CEO of that Downstream company has been announced, and he happens to be the former CEO of Chevron Phillips Chemical Company. So he's a strong leader, and somebody who we know well and have a good relationship with. We are having discussions with them to ensure that we remain aligned. But I can tell you that in the boardroom and in shareholder discussions with them, we see more alignment than we see differences, that's for sure. They will be a smaller company, and they will be a company that is purely exposed to the fundamentals of the Downstream business. And so that could become an issue over time, but we'll just have to see how that plays out.

Our next question comes from Paul Sankey with Deutsche Bank.

Mike, could I ask you about Californian crude pricing and feedstock pricing from the point of view of your position as a major producer and consumer there? I'm just thinking that things are shifting over time quite dramatically in California.

Yes, without knowing exactly what you're referring to, I will tell you as an equity producer of heavy crude in the San Joaquin Valley, we are seeing strong pricing for that crude today. So as an Upstream producer, we're enjoying the demand for that crude. And you match that up with where domestic natural gas prices are, and our steam flood there is quite economic at these kinds of natural gas prices. So it's a good place to be. There's strong demand for that crude. We've got options with both pipeline connections to those fields and the ability to bring in cargoes from other markets to support our Upstream ones with good strong runs of our equity heavy crudes and to keep our refinery competitive by taking advantage of opportunities to bring in South American heavies, for instance, into El Segundo. So it's been a market that I think has been good for our Upstream, and it hasn't been bad for our Downstream business.

Yes. I mean, you're heading exactly where I wanted you to. On the San Joaquin, I was just wondering you said it's the demand affect that's causing the big premium that we're seeing relative to historical premiums.

Yes, I mean, people are set up to run these heavy crudes, and not just our refinery but other refineries that are connected to it. And with some of the demand you see in Asia that is pulling some of the heavy crudes to Asia. The options have changed and the reliance on certain feedstocks, particularly when you're tied to a pipeline where you can get it in, is something that you have to confront as a refiner. So I do think you've seen some shifting dynamics there, which put a little more pressure on the refiners to be sure that they're as good as they can be, and it's been healthy for our Upstream.

Sure. Has it -- I know it's an Upstream question, but have you been suffering permitting issues, offsetting that benefit?

In San Joaquin Valley are you talking, Paul? No, we haven't. I mean, we obviously work very closely with the regulators, but we haven't seen any sort of negative impact associated with the additional regulatory oversight there.

Not out of the normal for California.

Well said, Mike, yes.

Okay. Great. And then my second if I could, Pat, to you. I know you hate it when I describe it as a war chest, but it is notable that you've got over $10 billion. You've obviously done the dividend step-up, which I guess is very unusual for you to raise twice in a year. I'm not sure you have done it, frankly. Why not more buyback in Q4?

Yes, Paul. I mean, I guess it's coming down to I guess, no matter how you give the cash away, people aren't -- not everybody's happy all the time. We felt very good about the second quarter -- the second time in a year dividend increased. We have done it in the past. Typically, when you have seen a significant run-up in commodity prices in a short period of time, that's really what we saw here in 2011. So our cash balance for 2011 is coming in much stronger than we thought it would be at the beginning of the year. And the dividend increase was really intended to signal confidence in our current position, as well as our future cash-generating position. We do look at the share repurchases every quarter. We do run through that sort of discussion with the Board. And at this particular time, the preference is given over to dividends. We think that actually sends a stronger signal about the performance of the company presently and really on a go-forward basis, because we view it as a permanent increase. And all I can say is we will continue to look every quarter at the cash balance, and we'll look at our medium-term outlook on prices, margins, C&E requirements. I did signal that we would have a more noticeable uptick in C&E in 2012, relative to current spending. So all of that gets taken into account when we look at the share repurchase decision.

Our next question comes from Allen Good with Morningstar.

Just had a question on -- you mentioned the Duvernay. I was just questioning any other activity as far as unconventional on lower 48 or even in Canada as far as acreage adds go during the quarter?

Not during the quarter, no. I mean, we've continued to add significantly in unconventional properties over the course of the last 12 and 18 months. And we've been pretty descriptive about what all those properties were. I think some 15 million acres in total added over that period of time for all acreage, of which certainly unconventional gas is a portion of that.

Okay. And then just one for Mike. It looks like last week, California regulators voted to move ahead with some sort of carbon market in California by 2013. I was just wondering what you see the impact for Chevron there? Do you think you're going to see increased costs? Or is that something more that we would be passed along to the consumer?

It's a great question. California has decided to go it alone -- or largely alone here on the climate change. The benchmark calculations are still not clear. The first compliance period is 2013 through 2014. Transportation fuels are not included in the first compliance period, which is where a real consumer pass-through issue will absolutely exist. And so at this point, and I think in the early portion of the program, we feel like because we have very efficient facilities and have invested in energy efficiency, that we can manage our way through the beginning. But I have to tell you just a few facts. I mean, California energy prices are some of the highest in the nation, whether you're talking about electricity or fuels. By policy, this is designed to drive prices higher. And at some point, businesses have to confront that as to the consumers of those businesses' products. And in a state where the economy is challenged, where employment is challenged and with a fiscal situation that is unsustainable, I think the effects here are predictable. And so there are -- we're on a policy path in California that I think is going to need to be addressed by policymakers over time.

Okay, our final question comes from Pavel Molchanov with Raymond James.

A very quick one if I may. I believe the last resource estimates for the Wheatstone fields was given back in 2008. Given the discovery since then, I'm curious what kind of color you can give on the current resource base?

Yes, Pavel, I don't have a number handy. Again, I hate to -- the next time I come into the call, I'll bring that slide. There is a slide that George showed that talked about the entire Australian resource opportunity. I just have to refer you to that, and we will update that slide come March, because we have had additional success. But I don't have a specific number for you here today. Okay, thank you very much. I think that concludes our discussion here this morning. And let me thank everybody for their participation on the call today. I want to thank particularly those who asked questions, because I think it enlarges the debate and the understanding for everybody. So thank you, everyone. I appreciate your interest in Chevron.

Thank you. Ladies and gentlemen, this concludes Chevron's third Quarter 2011 Earnings Conference Call. You may now disconnect.