WHEN: Today, Tuesday, March 8th
WHERE: CNBC's "Closing Bell"
Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Chevron Chairman and CEO John Watson on CNBC's "Closing Bell" (M-F, 3PM-5PM ET) today.
All references must be sourced to CNBC.
KELLY EVANS: CHEVRON ANNOUNCING SPENDING CUTS TO PRESERVE ITS DIVIDEND. BUT WHAT HAPPENS IF OIL PRICES CONTINUE TO DROP? JOINING US NOW IN AN EXCLUSIVE INTERVIEW IS CHEVRON CEO JOHN WATSON. WELCOME BACK TO POST NINE.
JOHN WATSON: KELLY, THANK YOU. IT'S GOOD TO BE BACK.
EVANS: YOU'VE RAISED YOUR DIVIDEND FOR 28 YEARS IN A ROW. ARE YOU GOING TO CONTINUE TO DO SO AND AT WHAT COST?
WATSON: WELL CERTAINLY, THAT'S OUR OBJECTIVE. WE'VE PAID A DIVIDEND CONTINUOUSLY SINCE 1926, 28 YEARS IN A ROW. AND WE DO INVEST CONTINUOUSLY IN THE BUSINESS AND THROUGH THE PRICE CYCLE THAT WE'RE SEEING. WE'VE GOT LOW PRICES TODAY BUT WE HAVE A NUMBER OF PROJECTS THAT ARE COMING ON STREAM WHICH WILL ADD REVENUE TO OUR BOTTOM LINE. BUT ALSO, AS WE FINISH THESE PROJECTS THAT ARE UNDER CONSTRUCTION, WE'LL BE ABLE TO TAKE OUR SPEND DOWN. AND BETWEEN THOSE TWO THINGS, WE'LL STAY PRETTY WELL BALANCED IN OUR CASH FLOW AND LOOK FORWARD TO MAINTAINING THAT RECORD OF DIVIDEND INCREASES.
EVANS: AND WANT TO TALK ABOUT A BIG PROJECT THAT IS COMING ON LINE FOR YOU GUYS OUT OF AUSTRALIA. ONE THAT HAS BEEN A BIG INVESTMENT. IT'S ON THE NAT GAS SIDE IN JUST A MOMENT. BUT YOU ANNOUNCED A BIG DECREASE IN YOUR CAPITAL EXPENDITURE PLANS. IS THAT BECAUSE YOU NEED THOSE FUNDS TO MAKE SURE THAT INVESTORS ARE GETTING THE DIVIDEND THAT THEY ARE CLAMMERING FOR HERE?
WATSON: WELL, THE CAPITAL SPENDING THAT WE HAVE TODAY IS REALLY A FUNCTION OF PROJECTS WE STARTED MANY YEARS AGO. SO WE SIGNALED THAT OUR SPENDING WOULD BE AT THE LOWER END OF THE RANGE THIS YEAR THAT WE HAD TALKED ABOUT PREVIOUSLY, $25 BILLION, BUT NEXT YEAR AND YEAR AFTER, SPENDING WOULD MOVE INTO THE 17 TO $22 BILLION PER YEAR RANGE. SO YES, SPENDING WILL COME DOWN, BUT THE INTERESTING THING THAT WE HAVE, IS WE'LL BE ABLE TO MAINTAIN PRODUCTION. GROW PRODUCTION TO THIS PERIOD AND THEN CONTINUE OUR INVESTMENTS IN SHORTER CYCLE ACTIVITIES SUCH AS THE SHALE IN THE PERMEAN BASIN.
EVANS: BECAUSE THAT'S ONE CONCERN THAT PEOPLE HAVE, IS THEY SAY, WELL WAIT A MINUTE, IF YOU TAKE DOWN THE INVESTMENT TOO MUCH, WILL YOU BE ABLE TO PRODUCE AS MUCH IN THE YEARS AHEAD? I MEAN, WHY NOT TAKE THE CAPITAL SPENDING ALL THE WAY TO ZERO?
WATSON: WELL, WE ARE IN A DEPLETING RESOURCE BUSINESS. SO IN ORDER TO MAINTAIN PRODUCTION OVER TIME, YOU DO NEED TO BE ABLE TO INVEST. BUT WHAT DISTINGUISHES CHEVRON FROM SOME OF OUR COMPETITORS AND A LOT OF THE SMALL PLAYERS IN THIS COUNTRY IS, AS WE TAKE SPENDING DOWN, OUR PRODUCTION WILL BE GROWING BECAUSE WE'RE COMPLETING PROJECTS THAT HAVE BEEN UNDER CONSTRUCTION. SUCH AS GORGON THAT YOU REFERENCED IN AUSTRALIA.
EVANS: IN AUSTRALIA YOU HAVE A BIG NATURAL GAS PROJECT, GORGON, AS YOU JUST SAID. BUT IT IS INTERESTING BECAUSE HERE IS ANOTHER AREA WHERE PRICES HAVE BEEN IN DECLINE AND WE JUST – OUR JACKIE DEANGELIS WAS JUST IN THE U.S. FACILITY WHERE WE'RE NOW GOING TO BE EXPORTING LIQUIDFIED NATURAL GAS. THERE'S MORE SUPPLY THAN EVER COMING INTO A MARKET WHERE PRICES ARE DEPRESSED. AT WHAT PRICE LEVEL ARE THE ECONOMIC – YOU KNOW, WHAT'S AT STAKE FOR YOU GUYS IF NAT GAS PRICES STAY THIS LOW?
WATSON: WELL, PRICES ARE UNDER PRESSURE BOTH OIL AND GAS. NATURAL GAS PRICES IN THIS COUNTRY ARE VERY LOW. AND LNG PRICES THAT ARE ON A SPOT MARKET ARE LOW. BUT WE'VE SOLD 75% OF OUR GAS ON OUR TWO BIG PROJECTS IN AUSTRALIA TO OIL LINKED PRICING GOING FORWARD. AND AS WE START TO SEE SOME STRENGTHENING IN THE OIL MARKETS, WE THINK THAT WE WILL BE GROWING PRODUCTION INTO A RISING MARKET. IN FACT, IF YOU LOOK AT THE COST OF THE GORGON PROJECT, WHILE THE HEADLINE COST IS $54 BILLION, PER BARREL, INCLUDING DEPRECIATION AND OPERATING EXPENSES, WE THINK GORGON WILL BE PROFITABLE AT ABOUT $40 BRENT THAT WE'RE SEEING TODAY.
EVANS: OK. AND WHAT DO YOU SAY TO PEOPLE WHO SAY NOW WAIT A MINUTE, THE COST OF GORGON IS WAY MORE THAN WE WERE TOLD ONCE ALL WAS SAID AND DONE. SO HOW DO WE THAT KNOW WHAT YOU'RE SAYING TODAY IS GOING TO BEAR OUT?
WATSON: WELL, THE PROJECT COSTS ARE IN THE PAST AND WE'RE CONCLUDING THAT SPEND. IT'S JUST ARITHMETIC TO LOOK AT THE RESERVES AND DIVIDE IT BY THE COSTS THAT HAVE BEEN INCURRED TO KNOW WHAT DEPRECIATION WILL BE. AND THEN OPERATING COSTS FOR LNG PLANTS ARE PRETTY WELL KNOWN TO BE QUITE LOW, DOWN AROUND THE $5 A BARREL RANGE. SO WE'LL BE ABLE TO GENERATE ENORMOUS CASH FLOW AS WE BRING ON THREE TRAINS OF LNG PRODUCTION AT GORGON, TWO TRAINS OF WHEATSTONE AND OTHER PROJECTS THAT WILL ADD TO OUR PRODUCTION BASE.
EVANS: I ASSUME YOU'RE GOING TO BE SELLING THAT TO THE JAPANESE, POTENTIALLY TO THE CHINESE? WHO ARE GOING TO BE THE CUSTOMERS HERE? CAN YOU DISPLACE RUSSIANS FROM THE EUROPEAN NAT GAS MARKET?
WATSON: WE DO. WELL IN GENERAL, THE ADVANTAGE OF THE GORGON LNG IS THAT IT'S BEEN SOLD FORWARD INTO THE JAPANESE AND KOREAN UTILITY MARKET PRIMARILY. WE'LL BE OVER 80% SOLD OVER THE NEXT – AS WE RAMP UP THESE PROJECTS. SO WE FEEL GOOD ABOUT WHERE WE'VE SOLD THAT GAS AND FEEL GOOD ABOUT THE STATUS OF THOSE PROJECTS NOW.
EVANS: LET'S GO BACK TO OIL FOR JUST A MOMENT HERE. WE'RE GETTING CONFLICTING REPORTS OUT OF THE MIDDLE EAST AND OUT OF OPEC ESPECIALLY ABOUT WHETHER THEY ARE GOING TO AGREE TO PRODUCTION FREEZES, MAYBE PRODUCTION DECLINES. IN MANY WAYS THEY KEEP POINTING THE FINGER BACK AT THE U.S. AND SAYING IT'S REALLY UP TO YOU GUYS. YOU'RE THE SWING PRODUCER NOW, YOU'RE DICTATING PRICES. IS THAT TRUE? THAT THE MOST LEVERAGE – PEOPLE HAVE THE MOST LEVERAGE ON THE OIL PRICE TODAY ARE U.S. PRODUCERS, YOURSELF INCLUDED?
WATSON: WELL, WE'RE STARTING TO SEE THE MARKET FORCES COME TO BEAR ON THE OIL MARKETS IN THIS COUNTRY. WE EXPECT OIL PRODUCTION TO DECLINE ABOUT 100,000 BARRELS A DAY PER MONTH. MONTH OVER MONTH. SO THAT MILLION BARRELS A DAY OF SURPLUS PRODUCTION IS STARTING TO DISSIPATE. AND THAT'S WHY YOU'VE SEEN SOME STRENGTHENING IN THE OIL MARKETS OVER THE LAST COUPLE OF WEEKS. MARKETS ARE FORWARD LOOKING AND WHILE OIL IS BEING PRODUCED IN SURPLUS TO WHAT DEMAND IS TODAY, WE'RE STARTING TO SEE THAT CHANGE. RIG COUNTS ARE DOWN 75%, INTERNATIONAL RIG COUNTS ARE DECLINING. AND YES, THE U.S. WILL BE THE FIRST TO BE AFFECTED, BUT I THINK YOU'LL START TO SEE PRODUCTION DECLINE IN MANY OTHER LOCATIONS AROUND THE WORLD.
EVANS: DO YOU EXPECT THAT WE'RE KIND OF GOING TO PEAK HERE NOW AT TOTAL GLOBAL PRODUCTION AND U.S. PRODUCTION AND THAT IT'S GOING TO CONTINUE TO DECLINE GOING FORWARD?
WATSON: WELL, U.S. PRODUCTION HAS DECLINED ABOUT 500,000 BARRELS A DAY SINCE ITS PEAK. AND IF WE GO DOWN 100,000 BARRELS A DAY A MONTH, YOU COULD SEE U.S. OIL PRODUCTION CONTINUE TO DECLINE. NOW THAT DOESN'T MEAN THERE IS AN OPPORTUNITY TO CONTINUE TO INVEST GOING FORWARD. BUT RIGHT NOW WITH THE KINDS OF PRICES WE'RE SEEING TODAY, NOT MANY PROJECTS ARE ECONOMIC. AND SO A LOT OF COMPANIES ARE WITHDRAWING CAPITAL FROM THE MARKET, THEY ARE CUTTING SHORT CYCLE SPEND IN MANY OF THE SHALE PLAYS IN THE U.S. AND WE'LL SEE MARKETS COME INTO BETTER BALANCE.
EVANS: AND I KNOW YOU GUYS HAVE THE BENEFIT OF SOME OF YOUR LEASES, YOU DON'T HAVE TO BE DRILLING THEM FOR THEM TO BE ACTIVE, THAT'S NOT ALWAYS TRUE FOR OTHER PEOPLE. JUST WANT TO ASK YOU ABOUT ANOTHER THING THAT HANGS ON THE OIL PRICE, ALONG WITH APPARENTLY EVERYTHING IN THE WORLD. MERGER AND ACQUISITION ACTIVITY. MANY, MANY PEOPLE ARE LOOKING TO YOU AND EXXON TO BE THE ONES THAT HELP SOP UP A LOT OF THE ASSETS THAT ARE OUT THERE AND EVEN SOME OF THE COMPANIES. AT WHAT PRICE LEVEL FOR WHAT PERIOD OF TIME DO YOU FEEL COMFORTABLE ENOUGH TO BE INQUISITIVE?
WATSON: WELL, WE'RE IN THE BUSINESS OF ACQUIRING LEASES, ACQUIRING DISCOVERED ASSETS, DISCOVERED OIL PROPERTIES AND COMPANIES OVER A LONG PERIOD OF TIME. BUT WE'RE IN THE ENVIABLE POSITION OF NOT HAVING TO DO AN ACQUISITION. OUR PRODUCTION IS GOING TO GROW THROUGH THE END OF THE DECADE EVEN AT LOWER LEVELS OF CAPITAL SPEND. NOW, IF THERE ARE OPPORTUNITIES, WE'LL CERTAINLY TAKE A LOOK AT THEM, BUT WE TEND TO BE VERY VALUE DRIVEN IN WHAT WE GO THROUGH. WE WANT TO ACQUIRE RESOURCE AT A COMPETITIVE COST AND SOMETHING THAT WOULD FIT IN OUR PORTFOLIO. BUT WE ARE FORTUNATE. WE DON'T HAVE TO DO THAT.
EVANS: AND SO YOU THINK THE OIL – YOU THINK THE BOTTOM IN OIL PRICES IS IN?
WATSON: I THINK WE'VE SEEN THE BOTTOM BUT THERE ARE FORCES AT WORK. YOU COULD SEE DECISIONS MADE BY OPEC NATIONS OR OTHERS THAT WOULD ADD TO SUPPLY AT A TIME WE DON'T NEED IT. BUT THE FUNDAMENTALS ARE MOVING IN OUR FAVOR WITH THE DECLINING PRODUCTION IN THE U.S. AND SOME OF THE PRESSURE ON HOST GOVERNMENTS AND NATIONAL OIL COMPANIES IN THEIR SPENDING AROUND THE WORLD.
EVANS: AND NO CUT TO THE DIVIDEND?
WATSON: WE'VE INCREASED THAT DIVIDEND 28 YEARS IN A ROW AND IT'S MY INTENTION TO KEEP GROWING IT AS A PATTERN OF EARNINGS AND CASH FLOW PERMIT OVER TIME.
EVANS: ALRIGHT. JOHN, THANK YOU FOR JOINING US.
WATSON: KELLY, THANK YOU VERY MUCH.
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