Chevron Corporation 10-Q Summary: Period Ended June 30, 1999
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 1999, and the six-month period ended June 30, 1999, for Chevron Corporation. The company operates in three primary segments: Exploration and Production, Refining, Marketing and Transportation, and Chemicals. The report includes unaudited financial statements and management's discussion of results, highlighting the impact of fluctuating crude oil prices, operational disruptions, and significant litigation.
Key Financial Metrics
| Metric | Q2 1999 | Q2 1998 | 6 Months 1999 | 6 Months 1998 |
|---|---|---|---|---|
| Total Revenues | $8,741 million | $7,969 million | $15,430 million | $15,597 million |
| Net Income | $350 million | $577 million | $679 million | $1,084 million |
| Diluted EPS | $0.53 | $0.88 | $1.03 | $1.65 |
| Operating Cash Flow (6mo) | $1,990 million (vs. $1,462 million in 1998) | |||
| Capital Expenditures (6mo) | $1,641 million (vs. $1,705 million in 1998) | |||
| Total Debt | $8.12 billion (Short-term: $3.80 billion; Long-term: $4.04 billion) | |||
| Cash and Equivalents | $752 million (as of June 30, 1999) | |||
| Current Ratio | 0.77 (down from 0.88 at year-end 1998) |
Material Changes vs. Prior Period
- Net Income Decline: Net income for Q2 1999 dropped 39% compared to Q2 1998. Excluding special items, operating earnings were $484 million in Q2 1999 versus $620 million in Q2 1998.
- Special Items: Q2 1999 included net special charges of $134 million, driven by $146 million in staff reduction/restructuring costs, $74 million in environmental provisions, and $43 million in asset write-offs. These were partially offset by $92 million in asset sale gains and $60 million in tax adjustments.
- Segment Performance:
- Exploration & Production: Earnings improved due to higher crude oil prices (U.S. realization up ~$3.00/barrel) and increased international production.
- Refining & Marketing: Earnings fell significantly (Q2 1999: $170 million vs. Q2 1998: $341 million). Operational problems at California refineries (Richmond and El Segundo) reduced earnings by approximately $100 million. International margins were weak, particularly in the Asia-Pacific region (Caltex).
- Chemicals: Recorded a net loss of $40 million in Q2 1999 due to depressed commodity prices and rising feedstock costs.
- Foreign Currency: Foreign currency losses of $32 million impacted Q2 1999 net income, compared to gains of $96 million in the prior year.
Guidance, Outlook, and Risks
- Outlook: Management expects international liquids production to remain at higher levels for the balance of 1999. However, U.S. downstream earnings are expected to be negatively affected in the second half due to continued refinery repairs. Chemical earnings are not expected to improve significantly in the near term.
- Cost Reduction: Chevron aims to reduce its total cost structure by $500 million in 1999 compared to 1998. Operating expense reductions (excluding special items) totaled $100 million in the first half.
- Year 2000 Compliance: The company estimates total compliance costs at approximately $200 million, with $130 million spent through June 30, 1999. Over 85% of embedded systems and 90% of IT issues are resolved. Contingency plans are being finalized.
- Legal Contingencies:
- Cities Service Litigation: A $742 million judgment (plus accruing interest) was affirmed by the Oklahoma Supreme Court. Chevron is petitioning the U.S. Supreme Court. A $964 million reserve was reclassified to current liabilities in June 1999.
- Unocal Patent: Chevron is appealing a ruling on a reformulated gasoline patent; potential exposure depends on future sales and alternate formulations.
- IRS Claim: Caltex faces an IRS claim totaling over $1.6 billion in interest and penalties; a letter of credit guarantee was reduced to $200 million in May 1999.
Investor Verification Checklist
- Refinery Recovery: Verify the timeline and cost impact of repairs at the Richmond and El Segundo refineries, specifically the hydrocracker completion expected by year-end 1999.
- Debt Structure: Review the high proportion of short-term debt ($3.8 billion) and the company's ability to refinance $2.7 billion of it on a long-term basis.
- Legal Reserves: Monitor the status of the Cities Service litigation appeal to the U.S. Supreme Court and potential changes to the $964 million current liability reserve.
- International Margins: Assess the duration of weak refining margins in the Asia-Pacific region (Caltex) and the impact of OPEC production curtailments on international volumes.
- Year 2000 Readiness: Confirm the completion of contingency planning and testing for mission-critical systems by the end of Q3 1999.