Chevron Corporation — Q3 2016 Form 10-Q
Business context and period: Unaudited results for the three and nine months ended September 30, 2016, compared with the same 2015 periods. Chevron operates through Upstream and Downstream segments.
Financial and operating performance
- Revenue: Q3 sales and operating revenue was $29.2 billion, down 11% year over year; nine-month revenue was $80.1 billion, down 21%. Lower crude oil and refined-product prices were the main factors.
- Earnings: Q3 net income attributable to Chevron was $1.283 billion ($0.68 diluted EPS), versus $2.037 billion ($1.09) a year earlier. The nine-month period recorded a $912 million loss ($0.49 per share), versus $5.175 billion income ($2.76) in 2015.
- Segments: Q3 Upstream earnings were $454 million, up from $59 million; Downstream earnings were $1.065 billion, down from $2.211 billion. Nine-month Upstream lost $3.467 billion and Downstream earned $3.078 billion.
- Margins: The filing does not provide a consolidated profit-margin figure. Management cited lower refined-product sales margins as a major reason for weaker Downstream earnings.
- Cash flow and investment: Nine-month operating cash flow was $8.983 billion, versus $14.899 billion. Cash capital expenditures were $14.1 billion, down from $22.1 billion. Capital and exploratory spending including affiliates was $17.2 billion, versus $25.3 billion.
- Liquidity and debt: September 30 cash and cash equivalents were $7.351 billion; cash, equivalents and marketable securities totaled $7.7 billion. Total debt and capital lease obligations were $45.6 billion, up from $38.5 billion at year-end 2015. The current ratio was 1.2, down from 1.4, and the debt ratio rose to 23.7% from 20.2%. Chevron reported $8.0 billion of committed credit facilities with no borrowings outstanding.
- Shareholder returns: Dividends paid in the first nine months totaled $6.007 billion. In October, Chevron raised its quarterly dividend by $0.01 to $1.08 per share. No shares were repurchased under the buyback program in the first nine months.
- Production: Q3 worldwide net oil-equivalent production was 2.513 million barrels per day, versus 2.539 million. Nine-month production was 2.569 million barrels per day, versus 2.605 million.
Material changes and unusual items
- Q3 earnings declined despite improved Upstream results; lower Downstream margins, the absence of prior-year derivative gains, and lower affiliate earnings weighed on results.
- Nine-month results were affected by low commodity prices, lower asset-sale gains, and the absence of the 2015 $1.6 billion Caltex Australia divestment gain. The 2016 period also included asset-sale gains.
- Cash-flow disclosures identify $2.8 billion of noncash reductions to property, plant and equipment related to impairments and other charges tied to reservoir performance and lower oil prices. Nine-month pretax impairment losses measured at fair value were reported at $3.202 billion.
- Assets held for sale totaled $3.893 billion at September 30, primarily properties expected to be sold within 12 months; their prior-period revenue and earnings contributions were described as not material.
- Q3 income tax benefit was $192 million; the nine-month tax benefit was $1.803 billion. Tax rates were affected by one-time tax items, jurisdictional mix and valuation allowances.
Outlook, commentary and risks
- Management estimated full-year 2016 production at approximately 2.6 million barrels of oil equivalent per day. The estimate was affected by the Partitioned Zone shut-in, Gorgon start-up issues and other external events.
- Chevron said it expects oil prices to rise over time as demand grows and supply growth slows, but the timing is unknown. It was reducing operating costs and capital spending and increasing asset sales in response to the low-price environment.
- Train 2 at the Gorgon Project in Australia achieved start-up. Production in the Saudi Arabia-Kuwait Partitioned Zone remained shut in as of early November 2016; restart timing was uncertain.
- Key risks include oil and gas prices, refining and chemical margins, project delays and start-up performance, production disruptions, political and regulatory conditions, currency movements, environmental obligations, litigation and access to liquidity and debt markets.
- The Ecuador litigation remained uncertain. Chevron said it could not estimate a reasonably possible loss or range of loss. The Second Circuit affirmed a U.S. judgment in Chevron’s favor in August 2016, and denied rehearing in October. Other environmental and legal contingencies, including MTBE claims and the Brazil drilling incidents, also remained subject to uncertainty.
Important facts for investors to verify
- Whether commodity prices and Downstream margins recover enough to restore earnings and operating cash flow.
- Progress against the 2016 production estimate, including Gorgon ramp-up and the timing of a Partitioned Zone restart.
- Whether asset sales, reduced capital spending and available financing can support liquidity, debt management and dividend payments.
- The timing and financial effects of impairments, tax matters, and significant litigation or environmental contingencies; management states some outcomes cannot be reliably estimated.
- The filing’s cash-flow figures show operating cash flow below cash capital expenditures for the first nine months; assess the resulting funding needs alongside dividends and increased debt.