Chevron Corporation — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. The interim financial statements are unaudited; management says they include necessary normal recurring adjustments and are not necessarily indicative of future results. Amounts below are in U.S. dollars.
Business context and key financial metrics
Chevron operates primarily through Upstream (exploration, production, and natural gas) and Downstream (refining, marketing, and chemicals). Its results are sensitive to crude oil and natural gas prices, production volumes, and refining margins.
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Sales and operating revenues | $59.8B | $66.7B | $118.7B | $125.1B |
| Net income attributable to Chevron | $7.21B | $7.73B | $13.68B | $13.94B |
| Diluted earnings per share | $3.66 | $3.85 | $6.93 | $6.94 |
| Operating cash flow | Not stated separately | Not stated separately | $18.3B | $20.5B |
| Capital and exploratory expenditures, including affiliates | $7.8B | $8.3B | $14.2B | $13.4B |
Q2 income before tax was $12.36B and income tax expense was $5.12B; the effective tax rate was 41%, unchanged year over year. The first-half effective rate was 44%, versus 42% in 2011. The filing does not provide a single consolidated operating-margin measure.
At June 30, cash and cash equivalents were $21.2B; cash, time deposits, and marketable securities together were approximately $21.5B. Current assets were $56.0B and current liabilities $32.7B, for a 1.7 current ratio. Total debt and capital lease obligations were $10.2B, unchanged from year-end 2011; the reported debt ratio was 7.3%, down from 7.7%. First-half dividends paid were $3.35B, and treasury-share purchases were $2.16B.
Material changes versus the prior comparable periods
- Q2 sales and operating revenues declined about 10%; Chevron-attributable earnings fell about 7%, and diluted EPS fell from $3.85 to $3.66. First-half earnings were down about 2% while diluted EPS was nearly flat.
- Upstream earnings declined to $5.62B from $6.87B in Q2 and to $11.79B from $12.85B for the first half. The company cited lower crude realizations and volumes in Q2; lower crude volumes were the main first-half factor.
- Downstream earnings increased to $1.88B from $1.04B in Q2 and to $2.69B from $1.67B for the first half. Gains on asset sales, improved refining margins in Q2, and favorable derivative effects contributed; first-half international product margins were lower.
- Worldwide net oil-equivalent production averaged 2.624 million barrels per day in Q2, down about 3% year over year; first-half production averaged 2.628 million barrels per day, down about 4%. Normal field declines, the Frade shut-in, and maintenance affected volumes.
- Operating cash flow decreased by $2.2B year over year in the first half, with working-capital changes a significant factor. Capital and exploratory spending increased about $0.9B.
Outlook, management commentary, risks, and unusual items
- Management described 2012 production as subject to uncertainty, including the Frade shut-in in Brazil, Angola LNG start-up and ramp-up, Usan production ramp-up in Nigeria, and the planned Tengiz facilities turnaround in Kazakhstan. No clear full-year production guidance figure is provided in the filing text.
- Management highlighted oil and gas prices, refining and chemical margins, project delays, cost inflation, field declines, political or regulatory changes, civil unrest, severe weather, and disruptions to facilities or transport as key operating risks. Brent averaged $108 per barrel in Q2; U.S. Henry Hub gas averaged $2.36 per thousand cubic feet in the first half, versus $4.30 a year earlier.
- Brazil: production at the Frade Field was suspended after a second seep was identified. The filing describes two civil lawsuits seeking $10.7B each and criminal charges against 11 employees; Chevron disputes the allegations and says potential regulatory fines and penalties are not currently determinable and could significantly affect a single period’s net income.
- Ecuador: an adverse judgment was affirmed by an appellate panel; Chevron pursued further appeal and international arbitration. The judgment included approximately $8.6B in damages and an additional approximately $8.6B in punitive damages because Chevron did not issue the required apology. Chevron disputes the judgment and its enforceability. Management says it cannot estimate a reasonably possible loss or range.
- Other contingencies include MTBE claims, environmental matters, tax audits, and indemnities. The company says additional environmental costs could be material to results in the period recognized, though it does not expect them to materially affect consolidated financial position or liquidity.
- In July 2012, Chevron announced a 90-cent quarterly dividend. It estimated full-year pension contributions of $1.15B, including $250M contributed in July. Caltex Australia’s planned Kurnell refinery conversion is expected to result in third-quarter impairment and related charges not expected to be material to consolidated results.
- Chevron reported $14.2B of first-half capital and exploratory expenditures, including affiliates’ spending; 91% was for Upstream. Management said spending can be adjusted if commodity prices or margins weaken. The company had $6.0B of committed credit facilities with no borrowings outstanding at June 30.
- Management concluded disclosure controls were effective at June 30, 2012, and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether production recovers from field declines and the Frade suspension, and whether the specified project start-ups and ramp-ups meet expectations.
- How oil and gas prices, refining margins, and derivative effects influence earnings in subsequent quarters.
- Developments and potential financial exposure in the Brazil and Ecuador proceedings, including enforcement efforts and the arbitration process.
- Whether capital spending, dividends, share repurchases, and pension contributions remain supported by operating cash flow and liquidity.
- The timing and financial effects of announced asset sales, refinery changes, environmental matters, and unresolved tax audits.