Chevron Corporation — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. The interim financial statements are unaudited.
Business context and results
Chevron operates in Upstream (oil and gas production) and Downstream (refining, marketing and chemicals). Results remain sensitive to commodity prices and refining margins.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Sales and other operating revenues | $32.877B | $27.844B | $64.401B | $50.914B |
| Income (loss) attributable to Chevron | $1.450B | $(1.470)B | $4.132B | $(2.195)B |
| Diluted earnings (loss) per share | $0.77 | $(0.78) | $2.18 | $(1.17) |
| Cash provided by operating activities | Not presented quarterly | $8.915B | $3.672B | |
| Cash capital expenditures | Not presented quarterly | $6.539B | $10.035B |
The filing does not provide a clear consolidated margin percentage. It reports higher revenues mainly from higher crude oil and refined-product prices and higher volumes. Income from equity affiliates rose to $1.316B in Q2 and $2.466B for the half-year, supported by stronger earnings at Tengizchevroil and other affiliates.
Material changes and segment performance
- Upstream: Q2 earnings were $853M versus a $2.462B loss; first-half earnings were $2.370B versus a $3.921B loss. Improvement reflected higher realizations and volumes, lower impairment charges and operating costs, and asset-sale gains. International production growth was a major contributor; U.S. production was up 3% in Q2 but down 1% for the six months.
- Downstream: Q2 earnings declined to $1.195B from $1.278B, principally because 2016 included asset-sale gains, partly offset by stronger refined-product margins. First-half earnings increased to $2.121B from $2.013B, with improved margins and the absence of a prior-year impairment partly offset by lower asset-sale gains.
- Worldwide net oil-equivalent production averaged 2.780 million barrels per day in Q2, up 10% year over year, and 2.728 million barrels per day for the first half, up 5%.
- Operating, selling, general and administrative expenses declined year over year; depreciation and exploration expenses also fell, mainly due to lower impairments and well write-offs.
Cash, debt and liquidity
- Cash and cash equivalents were $4.762B at June 30, 2017, down from $6.988B at year-end 2016. Operating cash flow improved year over year, while cash dividends of $4.061B and net financing outflows contributed to the cash decline.
- Total debt and capital lease obligations were $42.9B, versus $46.1B at December 31, 2016. The reported debt ratio declined to 22.7% from 24.1%.
- The current ratio was 1.0, compared with 0.9 at year-end. Chevron had $9.0B in committed credit facilities, with no borrowings outstanding under them at June 30; management said short-term obligations were expected to be refinanced on a long-term basis.
- Dividends paid in the first half totaled $4.061B. In July, Chevron declared a quarterly dividend of $1.08 per share. No shares were repurchased under the company’s repurchase program during the first half, and it did not plan program purchases for the rest of 2017.
Outlook, risks and contingencies
- Chevron estimated 2017 net production growth of 4%–9% versus 2016, assuming Brent crude at $50 per barrel and before anticipated asset sales. Expected asset-sale effects could reduce production by 25,000–75,000 barrels of oil-equivalent per day, depending on transaction timing.
- The company’s 2016–2017 asset-sale program targeted $5B–$10B in pretax proceeds; proceeds and deposits were $2.5B in the first half of 2017. Assets held for sale totaled $3.793B at June 30.
- Management expected oil markets to rebalance over time as demand grows and supply growth slows, but said timing was uncertain. Risks include commodity prices and margins, production and project execution, geopolitical events, regulation, foreign exchange, environmental obligations, and access to financing.
- Chevron disclosed an adverse Australian court decision concerning interest rates on certain intercompany loans and had sought permission to appeal. The potential tax effect was uncertain. Tax audits and related outcomes are also uncertain.
- The Ecuador litigation remains unresolved. An Ecuadorian judgment of approximately $9.5B remains subject to challenges and enforcement proceedings; Chevron disputes its validity. Management said it could not estimate a reasonably possible loss or range.
- Environmental and other contingencies may produce material charges in particular periods, although Chevron did not expect the disclosed environmental costs to materially affect consolidated financial position or liquidity. The company reported the dismissal of a Brazilian appeal relating to the Frade matter in July 2017.
- Management said disclosure controls were effective as of June 30, 2017, and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the production-growth outlook and asset-sale proceeds targets are achieved, and the realized production impact of divestitures.
- Whether operating cash flow can support capital spending and dividends under changing commodity prices, and how debt and liquidity evolve.
- Progress and potential financial effects of the Australian tax appeal, other tax examinations, Ecuador litigation, and environmental or other contingencies.
- Whether improved Upstream earnings are sustained and Downstream margins remain supportive; reported segment results included significant impairment and asset-sale effects.
- The timing and financial impact of planned asset sales and assets classified as held for sale.