Chevron Corporation — Q3 2017 Form 10-Q
Business context and reporting period. Chevron is an integrated global energy company with Upstream and Downstream segments. This unaudited quarterly filing covers the three and nine months ended September 30, 2017; comparisons are with the corresponding 2016 periods. Management states interim results are not necessarily indicative of future results.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Sales and operating revenues | $33.9 billion | $29.2 billion | $98.3 billion | $80.1 billion |
| Net income (loss) attributable to Chevron | $1.95 billion | $1.28 billion | $6.08 billion | $(912) million |
| Diluted earnings (loss) per share | $1.03 | $0.68 | $3.21 | $(0.49) |
| Cash provided by operating activities | Not provided separately for the quarter | $14.3 billion | $9.0 billion | |
| Cash capital expenditures | Not provided separately for the quarter | $9.8 billion | $14.1 billion |
- Segment earnings: Q3 Upstream earned $489 million versus $454 million; Downstream earned $1.81 billion versus $1.07 billion. For nine months, Upstream earned $2.86 billion versus a $3.47 billion loss, while Downstream earned $3.94 billion versus $3.08 billion.
- Cash and liquidity: Cash and cash equivalents were $6.64 billion at September 30, down from $6.99 billion at year-end 2016. The current ratio was 1.0, compared with 0.9 at year-end.
- Debt: Total debt and capital lease obligations were $42.0 billion, down from $46.1 billion at year-end. The debt ratio was 22.2%, versus 24.1%. Chevron had $9.0 billion of committed credit facilities, with none drawn at quarter-end.
- Shareholder distributions: Chevron paid $6.1 billion in common dividends in the first nine months. Quarterly dividends were $1.08 per share; an October declaration set the same amount for payment in December.
- Margins: The filing discusses stronger refined-product margins as a driver of earnings, but does not provide a clear consolidated margin percentage.
Material changes versus prior period
- Higher crude oil realizations, production and equity-affiliate income, together with asset-sale gains, helped drive the return to nine-month profitability. Operating cash flow rose year over year, primarily reflecting higher crude oil prices.
- Q3 Downstream earnings benefited substantially from asset-sale gains, including a $675 million gain on the Canadian refining and marketing asset sale; improved refined-product margins also contributed. Nine-month earnings included higher asset-sale gains and the absence of a 2016 downstream impairment.
- Nine-month cash capital expenditures declined to $9.8 billion from $14.1 billion; capital and exploratory expenditures including equity affiliates were $13.4 billion, down from $17.2 billion.
- Total asset-sale proceeds and deposits were $4.9 billion in the first nine months of 2017, compared with $2.2 billion in the prior-year period.
- Worldwide net oil-equivalent production averaged 2.724 million barrels per day for the first nine months, up from 2.569 million. International growth, including major projects, more than offset U.S. declines and asset-sale effects.
Outlook, management commentary, risks and unusual items
- Chevron estimated full-year 2017 production growth of 6%–8% versus 2016, assuming Brent crude at $50 per barrel and before anticipated asset sales. Asset sales were expected to reduce full-year production by about 30,000 barrels of oil-equivalent per day. The estimate is subject to operational, market, political and other uncertainties.
- The company’s 2016–2017 asset-sale program targeted $5–$10 billion of before-tax proceeds; $4.9 billion had been received or deposited in the first nine months of 2017. Management noted that asset dispositions may produce significant gains or losses.
- Management described oil and gas prices, refined-product and chemical margins, project execution, production declines, OPEC actions, geopolitical events, severe weather, regulation, foreign exchange, and access to credit as material uncertainties. Sustained low prices could prompt further asset impairments or write-offs. Management expected market balance could improve oil prices over time but said timing was unknown.
- Q3 international Upstream earnings were reduced by higher depreciation, including catch-up depreciation after Bangladesh operations were reclassified from held for sale to held and used, and an asset write-off. The filing also reports significant asset-sale gains; therefore reported earnings include notable disposal-related items.
- The Ecuador litigation remains unresolved. Chevron disputes the judgment and says a reasonably possible loss or range cannot be estimated. The company also faces MTBE, environmental, tax, guarantee, indemnification and other contingencies; some future costs could be material to results when recognized, although management did not expect environmental costs to materially affect consolidated financial position or liquidity.
- Chevron settled an Australian intercompany-loan tax dispute in August 2017; management said it had no material year-to-date impact. Tax audits and other tax matters remain uncertain, and developments could change unrecognized tax benefits.
- Revenue Recognition Topic 606 was expected to be adopted January 1, 2018, with no material financial-statement effect expected. The filing says management’s disclosure controls were effective and reports no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether production growth guidance is achieved, particularly after asset sales, field declines, project ramp-ups and the continued shut-in of Partitioned Zone production.
- How much of earnings and cash generation depends on asset-sale gains and whether the remaining asset-sale target is realized.
- Future operating cash flow, capital spending and dividend funding under changes in oil prices and refining margins; nine-month dividends exceeded nine-month net income attributable to Chevron.
- Debt refinancing, commercial-paper exposure and liquidity if commodity prices weaken or credit-market access changes.
- Developments in Ecuador litigation, environmental matters, tax audits and other contingencies for which ultimate outcomes or potential losses are uncertain.