Chevron Corporation — Q3 2018 Form 10-Q
Business context and reporting period. Chevron is a global integrated energy company reporting Upstream, Downstream and All Other activities. This unaudited quarterly report covers the three and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Sales and other operating revenues | $42.1B | $33.9B | $118.6B | $98.3B |
| Net income attributable to Chevron | $4.05B | $1.95B | $11.09B | $6.08B |
| Diluted earnings per share | $2.11 | $1.03 | $5.79 | $3.21 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $21.47B | $14.25B |
| Cash capital expenditures | Not stated for quarter | Not stated for quarter | $9.80B | $9.76B |
- Q3 attributable net income margin was approximately 9.6%, compared with 5.8% in Q3 2017; nine-month margin was approximately 9.4%, versus 6.2%. These calculations use reported sales and operating revenues.
- Q3 upstream earnings rose to $3.38B from $489M; downstream earnings declined to $1.37B from $1.81B. Nine-month upstream earnings were $10.03B versus $2.86B; downstream earnings were $2.94B versus $3.94B.
- Cash, cash equivalents and marketable securities were $9.75B at September 30, 2018, versus $4.82B at year-end 2017. Cash, cash equivalents and restricted cash totaled $10.74B.
- Total debt and capital lease obligations were approximately $36.1B, down from $38.8B at year-end 2017. The current ratio was 1.2, versus 1.0; the reported debt ratio was 19.0%, versus 20.7%.
- Cash dividends were $6.38B for the first nine months. Chevron repurchased $750M of shares in Q3. Capital and exploratory expenditures, including affiliates’ spending, were $14.35B for the nine months; affiliates’ portion did not require Chevron cash outlays.
Material changes versus the prior period
- Higher crude oil prices and production drove much of the earnings improvement, particularly in Upstream. Total nine-month production averaged 2.878 million barrels of oil equivalent per day, up from 2.724 million.
- Downstream’s nine-month earnings fell mainly because of lower refined-product margins and lower asset-sale gains. International downstream earnings were $1.09B versus $2.19B.
- All Other net charges increased to $1.87B for the first nine months from $710M, primarily due to higher tax items and interest expense.
- Reported revenue comparisons are affected by the 2018 adoption of revenue accounting guidance: excise, value-added and similar taxes collected for third parties are now netted against taxes rather than included in revenue. Chevron said this presentation change did not affect earnings.
Outlook, commentary and risks
- Management expected full-year 2018 net oil-equivalent production to be at the top of its original guidance range of 4%–7% growth over 2017, excluding asset sales. The outlook is subject to operational, market, geopolitical and other uncertainties.
- Chevron’s 2018–2020 asset-sale program targeted $5B–$10B in before-tax proceeds. Management noted cost pressures in the Permian Basin and emerging cost pressures in international and offshore markets.
- Q3 included a $550M write-off of the Tigris Project in the Gulf of Mexico. International Upstream included $380M of charges for an asset impairment and contractual settlement. Exploration expense increased substantially year over year, mainly from well write-offs.
- Operating cash flow benefited from higher prices and production, partly offset by higher working-capital requirements. The company reported a $1.88B operating working-capital cash use for the nine months.
- Chevron identified exposure to volatile oil and gas prices, refining and chemicals margins, project execution, cost inflation, political and regulatory changes, severe weather and operational disruption. Production in the Partitioned Zone remained shut in, with restart timing uncertain; the company also described a deteriorating operating environment in Venezuela.
- The Ecuador litigation remained a significant uncertain contingency. Ecuador’s Constitutional Court rejected Chevron’s appeal in July 2018; the company said no further appeal was available there. Separately, an international arbitration tribunal’s August 2018 Phase Two award favored Chevron and Texpet and found the Ecuadorian judgment procured through fraud, bribery and corruption. Damages remain for a later phase. Management said it could not estimate a reasonably possible loss or range; enforcement proceedings continued in other jurisdictions.
- Other matters include MTBE claims, environmental obligations, tax audits and climate-related proceedings. Chevron said additional environmental costs could be material to results in the period recognized, though it did not expect them to materially affect consolidated financial position or liquidity. The company also disclosed a proposed refinery safety consent decree involving a $2.95M penalty, $10M in environmental projects and estimated $150M in process-safety investments, subject to court approval.
- Chevron estimated that adoption of the new lease standard in 2019 would add approximately $3B–$4B of operating lease assets and liabilities to the balance sheet, with minimal expected income-statement and cash-flow effects.
Important facts for investors to verify
- Whether production growth, particularly from major projects and the Permian, meets the stated 2018 outlook and how asset sales affect reported volumes.
- How sustained oil prices, regional crude differentials, product margins and cost inflation affect segment earnings and cash generation.
- The durability of operating cash flow after working-capital changes, capital spending, dividends and share repurchases.
- Developments in Ecuador-related enforcement and arbitration, including the uncertain potential financial exposure.
- Potential effects of environmental, climate, tax and other legal contingencies, and the final scope and cost of the refinery safety commitments.