Chevron Corporation — Q2 2009 Form 10-Q
Business context and reporting period. Chevron is an integrated energy company operating in upstream exploration and production, downstream refining and marketing, and chemicals. This unaudited report covers the three and six months ended June 30, 2009, compared with the corresponding 2008 periods. Results are not necessarily indicative of future periods.
Financial performance
| Metric | Q2 2009 | Q2 2008 | First half 2009 | First half 2008 |
|---|---|---|---|---|
| Sales and operating revenues | $39.65B | $80.96B | $74.63B | $145.62B |
| Net income attributable to Chevron | $1.75B | $5.98B | $3.58B | $11.14B |
| Diluted EPS | $0.87 | $2.90 | $1.79 | $5.38 |
| Cash provided by operating activities | Not separately shown for the quarter | $5.69B | $15.31B |
Second-quarter and first-half revenues fell approximately 51% and 49%, respectively; earnings attributable to Chevron fell approximately 71% and 68%. Management attributed the steep declines mainly to lower crude-oil and natural-gas prices. The filing does not provide a consolidated operating-margin figure; it reports that refining and marketing margins were generally weak, although improved from the prior-year periods.
- Segment earnings, Q2 / first half: Upstream $1.52B / $2.79B, versus $7.25B / $12.38B in 2008; downstream $161M / $984M, versus a loss of $734M / $482M; chemicals $108M / $147M, versus $41M / $84M.
- Downstream improvement reflected better product margins, lower costs and asset-sale gains. International downstream earnings included $140M of after-tax gains in Q2 and $540M in the first half from sales of international marketing businesses.
- Cash from operations declined to $5.69B from $15.31B. Investing activities used $8.40B, including $10.41B of capital expenditures; financing provided $560M. Cash and cash equivalents ended the period at $7.24B, down from $9.35B at year-end 2008.
- At June 30, total debt and capital-lease obligations were $12.1B, up from $8.9B at year-end. Short-term debt was $868M and long-term debt $10.85B. Chevron issued $5.0B of long-term debt during the half. The debt ratio was 12.1%, versus 9.3% at year-end.
- Current assets were $34.72B and current liabilities $25.36B; the reported current ratio was 1.4, compared with 1.1 at year-end. Chevron had $5.1B in committed credit facilities, with none drawn.
Material changes and operating developments
- Average upstream crude-oil and liquids realizations fell to $50.42 per barrel in Q2 from $108.67 a year earlier in the U.S., and to $53.17 from $110.44 internationally. U.S. and international natural-gas realizations also declined substantially.
- First-half worldwide net oil-equivalent production averaged 2.67 million barrels per day, up from 2.57 million. International production gains, including Agbami and Tengiz, were partly offset by declines, outages and OPEC curtailments; U.S. production was lower.
- First-half capital and exploratory spending, including equity affiliates, was $11.4B, versus $10.3B. About 80% was directed to upstream projects; spending included $2B for an upstream concession extension.
- Cash dividends paid in the first half were $2.59B. Chevron declared a quarterly dividend of $0.68 per share in July, payable in September. No shares were repurchased under the public buyback program in the first half, and management said it did not plan repurchases in Q3.
Outlook, risks and unusual items
- Management estimated full-year 2009 oil-equivalent production would average 2.66 million barrels per day. The estimate is subject to OPEC quotas, project start-up timing, contract and fiscal terms, demand, weather and political or operational disruptions.
- Management said industry cost pressures had softened and expected the downward cost trend to continue during 2009 if oil prices did not significantly rebound. It described Chevron as financially strong and able to increase borrowing or modify capital spending to support the dividend and credit ratings.
- Key exposures include volatile oil and gas prices, refining and chemicals margins, political and regulatory changes, project execution and production risks, foreign exchange, environmental obligations and litigation. Management said derivative activities did not create material market or credit risks.
- Chevron faced 49 pending MTBE lawsuits and claims; ultimate exposure was not determinable and could materially affect earnings in a period. In the Ecuador case, the court could rule at any time. A court-appointed engineer’s reports proposed very large assessments, which Chevron disputed; management said a reasonably possible loss could not be estimated and the ultimate outcome remained uncertain.
- Other contingencies include environmental liabilities and indemnities. Chevron said additional environmental costs could be material to results when recognized, although it did not expect them to materially affect consolidated financial position or liquidity. The filing also disclosed $155M of pre-tax impairment losses on held-and-used assets and $48M on assets held for sale.
- First-half pension contributions were $148M; management estimated full-year contributions of approximately $1.0B, subject to investment performance, obligations and other factors.
Important facts for investors to verify
- Whether oil and gas prices, upstream realizations and production volumes support the company’s full-year production estimate and earnings recovery.
- How much downstream earnings improvement is recurring versus attributable to the $540M first-half after-tax asset-sale gains, and whether weak refining margins persist.
- Whether operating cash flow can recover relative to capital spending, dividends and debt obligations, particularly after the $2B concession payment.
- Progress and potential financial exposure in the Ecuador and MTBE matters, environmental indemnities and other contingencies; the filing states some losses cannot be estimated.
- Actual pension funding needs, project start-up performance, and any changes to capital spending, borrowing, dividend policy or credit ratings.