Chevron Corporation 10-Q Summary: Period Ended September 30, 1998
Business Context and Reporting Period
This Form 10-Q covers Chevron Corporation's operations for the quarterly period ended September 30, 1998, and the nine-month period ended on that date. Chevron is an integrated energy company engaged in exploration and production, refining, marketing, transportation, and chemicals. The reporting period was significantly impacted by a collapse in global crude oil prices, the Asian economic crisis, and severe weather events in the U.S. Gulf of Mexico.
Key Financial Metrics
| Metric | Q3 1998 | Q3 1997 | 9M 1998 | 9M 1997 |
|---|---|---|---|---|
| Total Revenues | $7,678 million | $10,328 million | $23,300 million | $31,695 million |
| Net Income | $461 million | $727 million | $1,538 million | $2,381 million |
| Diluted EPS | $0.70 | $1.10 | $2.34 | $3.62 |
| Operating Cash Flow (9M) | $2,838 million (vs. $3,527 million in 1997) | |||
| Cash & Equivalents | $1,152 million (as of Sept 30, 1998) | |||
| Total Debt | $7,176 million (Short-term: $2,867M; Long-term: $4,032M) | |||
| Debt Ratio | 29% (Total Debt / Total Capitalization) | |||
| Current Ratio | 0.89 (Current Assets / Current Liabilities) |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 25% in Q3 and 26% year-to-date compared to 1997. This was driven by a 32% drop in U.S. crude oil realizations (to $11.31/bbl in Q3) and the absence of revenues from the U.K. refining and marketing business exited in late 1997.
- Earnings Drop: Net income fell 37% in Q3 and 35% year-to-date. Excluding special items, operating earnings declined 47% in Q3 and 39% year-to-date, primarily due to weak commodity prices and lower margins in the chemicals sector.
- Special Items: Q3 1998 net income included $75 million in net benefits from special items (insurance settlements and asset sales), partially offset by $43 million in restructuring costs for the Caltex affiliate. Year-to-date special benefits totaled $96 million.
- Weather Impact: Hurricanes in September caused approximately $50 million in costs and production curtailments, including significant damage to the Pascagoula, Mississippi refinery.
Guidance, Outlook, and Risks
- Outlook: Management expects earnings to remain weak for the balance of 1998 due to depressed crude prices, excess industry capacity in chemicals, and the Asian economic crisis. Capital expenditures for 1998 are expected to be approximately $5.5 billion, below the original $6.3 billion budget.
- Year 2000 Compliance: The company estimates total costs for Year 2000 compliance at $200–$300 million. While risks are being managed, potential disruptions from third-party failures could materially affect operations.
- Legal Contingencies: Significant pending litigation includes a $742 million judgment (plus interest) from the Cities Service case (under appeal) and a patent dispute with Unocal regarding reformulated gasoline. Additionally, the Caltex affiliate faces a substantial IRS claim regarding excise taxes, for which a $2.33 billion letter of credit has been posted.
- Operational Risks: Political instability in West Africa (Nigeria, Angola) and the Euro currency conversion in 1999 are monitored as potential risks to operations and financial results.
Investor Verification Checklist
- Commodity Price Sensitivity: Verify the impact of current crude oil and natural gas prices on future cash flows, given the 30%+ decline in realizations compared to 1997.
- Debt Structure: Review the high proportion of short-term debt ($2.87 billion) and the company's reliance on commercial paper refinancing to maintain liquidity.
- Legal Exposure: Assess the potential financial impact of the pending appeal in the Cities Service lawsuit and the outcome of the Unocal patent dispute.
- Year 2000 Costs: Confirm the final cost of Year 2000 remediation and the status of critical third-party vendor compliance.
- Caltex Restructuring: Monitor the progress and cost savings realization of the Caltex affiliate's restructuring in response to the Asian economic crisis.