Chevron Corporation — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Interim financial statements are unaudited. Unless noted, amounts are U.S. dollars; financial amounts are in billions.
Business context and financial results
Chevron operates Upstream and Downstream businesses. Results were pressured by sharply lower oil and gas realizations, while stronger refining margins and asset-sale gains supported Downstream earnings.
- Q2 revenue: $36.8 billion, down 34% from $55.6 billion in Q2 2014. First-half revenue was $69.1 billion, down 35% from $106.6 billion.
- Q2 earnings attributable to Chevron: $571 million, or $0.30 diluted per share, versus $5.665 billion, or $2.98 per share, a year earlier. First-half earnings were $3.138 billion, or $1.67 diluted per share, versus $10.177 billion, or $5.34.
- Q2 segment earnings: Upstream lost $2.219 billion versus earnings of $5.264 billion in Q2 2014; Downstream earned $2.956 billion versus $721 million. First-half Upstream lost $659 million versus earnings of $9.571 billion; Downstream earned $4.379 billion versus $1.431 billion.
- Key drivers: Lower upstream realizations and higher depreciation, largely from impairments, drove the earnings decline. Downstream benefited from higher refined-product margins and a $1.6 billion gain on the Caltex Australia sale.
- Cash flow: First-half operating cash flow was $9.539 billion, down from $16.298 billion. Capital expenditures were $15.245 billion; operating cash flow less capital expenditures was negative $5.706 billion. Cash dividends paid were $3.994 billion.
- Liquidity: Cash, cash equivalents and marketable securities totaled about $12.5 billion at June 30, down about $0.7 billion from year-end. The current ratio was 1.4, versus 1.3 at December 31, 2014.
- Debt: Total debt and capital lease obligations were $31.9 billion, up from $27.8 billion at year-end. The reported debt ratio rose to 17.1% from 15.2%. Chevron reported $8.0 billion in committed credit facilities, with no borrowings outstanding under them.
- Production: First-half net oil-equivalent production averaged 2.638 million barrels per day, up 3% year over year.
Material changes and unusual items
- First-half depreciation, depletion and amortization rose to $11.369 billion from $7.972 billion. The filing attributes a substantial portion of the increase to impairments related to a downward revision in the longer-term crude oil price outlook.
- Noncash reductions to property, plant and equipment associated with impairments and project suspensions, including related tax effects, totaled $2.6 billion in the first half. Nonrecurring fair-value measurements recorded before-tax losses of $2.860 billion for the first six months.
- Chevron recorded a $264 million pretax restructuring charge in Q2 ($160 million after tax) for employee reduction programs affecting corporate staffs and certain Upstream operations. Terminations are expected to be substantially completed by the end of 2016.
- Exploration expense increased to $1.667 billion for the first half from $1.109 billion, mainly due to higher well write-offs. The company also expensed $466 million of previously capitalized exploratory well costs during the period.
- First-half capital and exploratory expenditures, including the company’s share of affiliate spending, were $17.3 billion, down from $19.6 billion.
Outlook, risks and contingencies
- Management estimated full-year 2015 net oil-equivalent production would be flat to 3% growth compared with 2014. This is an estimate subject to operational, market, regulatory and geopolitical uncertainties; the filing gives no specific earnings guidance.
- Management said sustained low oil prices could further affect earnings, cash flow, leverage, capital spending and production outlook. Possible responses include additional operating-cost and capital-spending reductions and asset sales. The timing of any oil-price recovery was unknown.
- Production in the Saudi Arabia-Kuwait Partitioned Zone was shut in at the end of May because of difficulties obtaining work and equipment permits. The duration was uncertain; management did not expect the 2015 financial effect to be significant.
- Major project updates included continued Gorgon commissioning and Wheatstone construction, with Wheatstone reported more than 65% complete; Jack/St. Malo production ramp-up was exceeding expectations.
- The Ecuador litigation remained a significant contingent matter. The Ecuadorian judgment stood at approximately $9.5 billion after the country’s National Court removed punitive damages; Chevron appealed to Ecuador’s Constitutional Court. Enforcement actions and related arbitration and U.S. litigation continued. Management said it could not estimate a reasonably possible loss or range.
- Other contingencies included MTBE litigation, environmental obligations, tax audits, guarantees, purchase commitments, and Brazilian proceedings related to the Frade Field seeps. The filing states that ultimate exposure in some matters is not determinable.
- Chevron declared a Q3 dividend of $1.07 per share in July. It said it did not plan share repurchases under its repurchase program in 2015.
Important facts for investors to verify
- Whether oil and gas prices, refining margins and upstream realizations support the production and earnings outlook.
- How much of reported earnings and cash flow depends on asset-sale proceeds and whether divestments continue.
- The scale, timing and cash consequences of impairments, project suspensions, restructuring and planned capital spending.
- Whether operating cash flow can cover capital investment and dividends if low commodity prices persist, and how debt and liquidity evolve.
- Updates to the Ecuador proceedings and other litigation, tax and environmental contingencies, for which outcomes or potential losses may be uncertain.