Chevron Corporation (CVX) — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited interim financial statements. Amounts are U.S. dollars unless noted.
Business context and key financial metrics
Chevron operates globally across Upstream and Downstream businesses. Results were heavily affected by COVID-19-related demand reductions, lower commodity prices, production curtailments and impairments.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Sales and other operating revenues | $24.0B | $34.8B | $69.6B | $105.3B |
| Net income (loss) attributable to Chevron | $(207)M | $2.58B | $(4.88)B | $9.53B |
| Diluted earnings (loss) per share | $(0.12) | $1.36 | $(2.63) | $5.02 |
| Net cash provided by operating activities | Not presented for quarter | Not presented for quarter | $8.34B | $21.66B |
| Free cash flow (operating cash flow less capital expenditures) | Not presented for quarter | Not presented for quarter | $1.48B | $11.75B |
- Segment earnings: Q3 Upstream $235M versus $2.70B; Downstream $292M versus $828M. For nine months, Upstream recorded a $2.93B loss and Downstream earned $385M.
- Cash, debt and liquidity: At September 30, cash and cash equivalents were $6.87B; cash, cash equivalents and restricted cash totaled $7.79B. Total debt and finance lease liabilities were $34.8B, up from $27.0B at year-end 2019. The company reported a 1.3 current ratio, 20.9% debt ratio and 17.5% net debt ratio.
- Capital spending and distributions: Nine-month cash capital expenditures were $6.86B; capital and exploratory expenditures including equity affiliates were $10.32B. Common dividends paid were $7.19B. The company paid $1.29 per share in Q3.
- Margins: The filing does not provide a single consolidated profit-margin figure. Refining margins and sales volumes were pressured; segment earnings are summarized above.
Material changes versus the prior comparable period
- Q3 revenue fell $10.8B year over year, primarily from lower crude and refined-product prices and lower refined-product volumes. Nine-month revenue declined $35.7B.
- Nine-month results swung from $9.53B of Chevron-attributable earnings to a $4.88B loss, reflecting lower realizations and production, impairment and write-off charges, and weaker affiliate earnings. The company recorded $5.28B of before-tax impairments and write-offs through September, including full impairment of its Venezuelan Petropiar and Petroboscan investments totaling about $2.6B.
- Operating cash flow fell to $8.34B from $21.66B; free cash flow fell to $1.48B from $11.75B. Cash capital expenditures declined by about $3.1B.
- Debt increased following $12B of long-term note issuances in May and August, partly offset by debt repayments. The share repurchase program was suspended in March; no program purchases were made in Q3.
Outlook, management commentary and risks
- Management said demand and commodity prices had begun recovering but remained below pre-pandemic levels, and expected results to remain challenged. The extent and duration of COVID-19 impacts remained uncertain.
- Chevron reduced planned 2020 capital expenditures by up to 30% from the original budget, to $14B, and said it was on track to reduce 2020 operating costs by $1B versus 2019. It expected 2020 production to be relatively flat versus 2019, subject to significant uncertainties. Management estimated lower planned capital spending could reduce proved reserves by about 10%.
- Management cited a strong balance sheet, investment-grade ratings and access to nearly $10B in committed credit facilities. The company said its priorities were protecting the dividend, prioritizing value-generating capital spending and maintaining balance-sheet strength. The October 2020 quarterly dividend was declared at $1.29 per share.
- Q3 oil-equivalent production curtailments were about 154,000 barrels per day; management expected approximately 100,000 barrels per day in Q4. Refining crude utilization was about 75% as of late October; jet-fuel sales were down about 55% year over year, while gasoline sales were down less than 10% and diesel sales were relatively flat.
- Q3 restructuring adjustments and charges brought accrued severance liability to $892M; the employee-reduction program was expected to be substantially completed by the end of 2021. The nine-month effective tax rate was 24%; tax benefits and jurisdictional earnings mix affected the rate, which management cautioned may vary substantially.
- Subsequent event: Chevron completed its Noble Energy acquisition on October 5, 2020, after quarter-end. The stated purchase price was $4.1B, with about 58 million Chevron shares issued; Chevron also assumed debt with a book value of $7.7B. Integration and realization of expected benefits are risks.
- Contingencies: The filing describes environmental, tax, MTBE, climate-related and Louisiana coastal litigation. Chevron said it could not estimate a reasonably possible loss for the Ecuador matter and disputed the judgment. It also disclosed California environmental proceedings that could result in civil penalties of $100,000 or more.
Most important facts for investors to verify
- Whether commodity prices, product demand and refining margins recover sufficiently to improve earnings and operating cash flow.
- Whether the $14B 2020 capital-spending target, $1B operating-cost reduction and production outlook are achieved, and the resulting effect on reserves and future output.
- How debt, liquidity and dividend coverage evolve if market conditions remain weak; note the increase in debt and the suspension of share repurchases.
- The Noble acquisition’s final purchase accounting, integration progress, assumed-debt impact and realized benefits.
- Developments in impairments, tax examinations and litigation, including the Ecuador arbitration and environmental claims.