Chevron Corporation — Q2 2010 Form 10-Q
Business context and reporting period. Chevron is an integrated energy company reporting unaudited results for the three and six months ended June 30, 2010, compared with the same 2009 periods. Its reportable segments are Upstream and Downstream; chemicals and certain enabling operations were reclassified between segments effective January 1, 2010, and prior periods were conformed.
Key financial results
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Sales and operating revenues | $51.1 billion | $39.6 billion | $97.8 billion | $74.6 billion |
| Net income attributable to Chevron | $5.41 billion | $1.75 billion | $9.96 billion | $3.58 billion |
| Diluted earnings per share | $2.70 | $0.87 | $4.97 | $1.79 |
| Operating cash flow | Not presented separately | Not presented separately | $15.1 billion | $5.7 billion |
- Segment earnings: Upstream earned $4.54 billion in Q2 and $9.27 billion in the first half, versus $1.66 billion and $3.04 billion in 2009. Downstream earned $975 million and $1.17 billion, versus $131 million and $884 million. First-half 2010 All Other net charges were $476 million, compared with $337 million.
- Drivers and margins: Management attributed the earnings improvement principally to higher crude oil and natural gas prices and increased production. Downstream results also benefited from improved refined-product margins, derivative effects and chemicals earnings. Management said refining and marketing margins remained relatively weak. The filing does not provide a consolidated operating-margin figure.
- Cash flow and investment: First-half operating cash flow of $15.1 billion exceeded $9.4 billion of capital and exploratory spending, including affiliates, and $2.8 billion of dividends paid. Capital and exploratory spending was down from $11.4 billion in 2009; that prior-period amount included a $2 billion payment related to an upstream agreement extension.
- Liquidity and debt: Cash, cash equivalents, time deposits and marketable securities totaled about $13.2 billion at June 30, up $4.4 billion from year-end. Current assets were $42.4 billion and current liabilities $26.0 billion; the reported current ratio was 1.6, versus 1.4 at year-end. Total debt and capital lease obligations were $10.5 billion, broadly unchanged from year-end; the debt ratio was 9.5%, down from 10.3%. Chevron reported $6.0 billion of committed credit facilities with no borrowings outstanding.
- Dividends: The company paid $2.8 billion in first-half dividends. In July it declared a quarterly dividend of $0.72 per share, payable in September.
Material changes and unusual items
- First-half 2010 earnings included $175 million after-tax ($244 million before tax) of restructuring charges for planned workforce reductions in Downstream and corporate staffs. About 3,800 positions were covered by the programs, with completion expected by the end of 2011.
- Comparable 2009 earnings included after-tax asset-sale gains of $140 million in Q2 and $540 million in the first half. This notably affected the year-over-year comparison for international Downstream.
- First-half production averaged 2.76 million barrels of oil equivalent per day, up from 2.67 million in 2009. Worldwide production was 2.746 million barrels per day in Q2 and 2.764 million in the first half.
- Effective tax rates declined: 38% versus 47% for Q2 and 39% versus 45% for the first half. Chevron cited currency translation effects, increased use of certain foreign tax credits and a lower share of income from higher-tax jurisdictions.
- Chevron began investing in time deposits with maturities over 90 days; $3.8 billion was held at June 30. These deposits are reported separately from cash and cash equivalents.
Outlook, management commentary and risks
- Chevron estimated 2010 production at approximately 2.78 million barrels of oil equivalent per day using the 2009 average WTI price of $62 per barrel, or 2.75 million per day using the first-half 2010 average price of $78. These estimates are subject to project timing, field declines, prices, quotas, fiscal terms, demand, weather and political or operational disruptions.
- The Deepwater Horizon accident did not involve a Chevron well, and management reported no effect on current Gulf of Mexico production. Federal drilling suspensions affected some development and exploration drilling; the company did not expect a material full-year production impact, but future regulatory effects were uncertain. Chevron and three other companies announced a planned rapid-response system with an initial $1 billion investment to be funded equally.
- Management said weak downstream market conditions could continue for several years and described restructuring and potential asset or market exits. Planned actions included ending branded fuel sales in certain U.S. markets and soliciting bids for selected terminals and operations.
- Major contingencies include 53 pending MTBE lawsuits and claims, environmental obligations, and the Ecuador litigation. Chevron said the Ecuador case could be decided at any time, contested the allegations, and stated that a reasonably possible loss or range could not be estimated. Court-appointed engineer reports cited large proposed assessments, but were not binding on the court.
- Other uncertainties include tax audits and possible changes in unrecognized tax benefits, indemnities with no stated maximum for certain environmental claims, and a California court ruling affecting permits for upgrades at the Richmond refinery. Management said the financial effect of the Richmond ruling could not be estimated and could be significant to earnings in a future period.
- Forward-looking results are exposed to commodity prices, refining and chemical margins, production and project execution, regulatory and political developments, environmental and litigation liabilities, foreign exchange, and other factors. Interim results are unaudited and are not necessarily indicative of future results.
Most important facts for investors to verify
- How much of the earnings and cash-flow improvement is sustainable if oil and gas prices, derivative results or refining margins change.
- Whether production meets the stated 2010 outlook, particularly given project, quota, decline and regulatory risks.
- The ultimate cost and timing of workforce reductions, downstream restructuring and planned asset or market exits.
- Developments in Ecuador, MTBE and environmental matters, including any change in the company’s ability to estimate potential losses.
- Future capital spending, pension contributions, liquidity and debt levels, and whether the dividend and new share-repurchase program remain consistent with cash-generation priorities.