CHEVRON CORP quarterly report, Q2 FY2018

Chevron Corporation (10-Q) — Second Quarter 2018

Business context and reporting period. Chevron is a global integrated energy company with Upstream and Downstream segments. This unaudited filing covers the quarter and six months ended June 30, 2018; comparisons are with the corresponding 2017 periods.

Financial results and position

Metric	Q2 2018	Q2 2017	Six months 2018	Six months 2017
Sales and operating revenues	$40.49 billion	$32.88 billion	$76.46 billion	$64.40 billion
Net income attributable to Chevron	$3.41 billion	$1.45 billion	$7.05 billion	$4.13 billion
Diluted earnings per share	$1.78	$0.77	$3.68	$2.18
Net margin, calculated	8.4%	4.4%	9.2%	6.4%

Quarterly revenue rose about 23% and Chevron-attributable earnings about 135% year over year. Six-month revenue rose about 19% and earnings about 71%.
Upstream earnings were $3.30 billion for Q2 and $6.65 billion for the half, up from $853 million and $2.37 billion, respectively. Higher crude realizations and natural gas sales volumes were key drivers.
Downstream earnings fell to $838 million in Q2 from $1.20 billion, and to $1.57 billion for the half from $2.12 billion, primarily reflecting weaker refined-product margins. International Downstream was particularly affected by lower margins and negative inventory effects.
Operating cash flow was $11.90 billion for the first half, versus $8.75 billion. Working capital was a $2.29 billion use of cash. Cash capital expenditures were $6.22 billion; capital and exploratory expenditures including affiliates were $9.22 billion, compared with $8.93 billion.
Cash and cash equivalents were $7.63 billion at June 30, versus $4.81 billion at year-end; including restricted cash, the cash-flow statement balance was $8.70 billion. Current assets were $34.26 billion and current liabilities $31.86 billion; the reported current ratio was 1.1.
Total debt and capital lease obligations were $38.5 billion, down from $38.8 billion at year-end. The debt ratio was 20.2%, versus 20.7%. Short-term debt on the balance sheet was $8.60 billion; Chevron also reported $10.0 billion of commercial paper outstanding and $10.0 billion in committed credit facilities, with none drawn.
The quarterly dividend was $1.12 per share; $4.25 billion of common dividends were paid during the first half.

Material changes and interpretation

Higher crude oil prices and production lifted Upstream results. First-half worldwide net oil-equivalent production averaged 2.839 million barrels per day, up from 2.728 million. Higher production from Permian properties and Australian projects contributed, partly offset by asset sales and field declines.
Downstream earnings weakened, especially internationally, as refined-product margins declined. U.S. refinery crude input was lower in Q2, principally due to planned turnaround activity.
Revenue comparisons are affected by the 2018 adoption of revenue-recognition guidance: excise, value-added and similar taxes collected for third parties are now excluded from sales and netted in taxes other than income. The change did not affect earnings; 2017 comparative revenue included $1.77 billion for Q2 and $3.45 billion for the first half of these taxes.
Income tax expense increased to $1.48 billion in Q2 and $2.90 billion for the half. The effective tax rate was 30% for Q2 and 29% for the half, versus 25% and 18% in the prior-year periods, reflecting earnings mix across tax jurisdictions.
Other income declined, primarily because of lower asset-sale gains. First-half operating expenses and SG&A increased by $741 million year over year, including higher services and fees and a receivable write-down. Depreciation, depletion and amortization decreased, mainly due to lower impairments and lower depreciation rates in certain fields.

Outlook, risks and contingencies

Management estimated full-year 2018 net oil-equivalent production growth of 4%–7% versus 2017, assuming Brent crude at $60 per barrel and excluding anticipated 2018 asset sales. The estimate is subject to project timing, OPEC actions, prices, field declines, weather, geopolitical developments and other operating risks.
Chevron’s 2018–2020 asset-sale program targets $5–$10 billion of pretax proceeds. In July 2018, the company announced plans to begin share repurchases, expected at $3 billion annually based on the current outlook. The July-declared quarterly dividend was $1.12 per share.
Management cited cost pressure in North American unconventional operations, particularly the Permian Basin, with increased commodity prices and activity; international and offshore markets were also showing signs of rising costs. Earnings remain sensitive to oil and gas prices, refining margins, demand, regulation, foreign exchange, and political or operational disruption.
Wheatstone LNG Train 2 began operating. Production in the Partitioned Zone between Saudi Arabia and Kuwait remained shut in as of early August; restart timing was uncertain, though management did not expect a significant 2018 financial effect.
The Ecuador Constitutional Court rejected Chevron’s appeal on July 10, 2018, leaving no further appeal in Ecuador. Recognition or enforcement actions remained in other jurisdictions; the company said it would contest them and could not estimate a reasonably possible loss or range. Management also disclosed MTBE, environmental, tax, guarantee and climate-related proceedings and contingencies.
Chevron recorded $298 million of pretax losses on assets measured at fair value on a nonrecurring basis in the first half, including $134 million in Q2, primarily for properties held for sale. Assets held for sale totaled $1.24 billion at June 30.
Management stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.

Important facts for investors to verify

Whether production growth and major project ramp-ups support the 4%–7% full-year outlook, and how asset sales affect reported production.
Whether Upstream earnings remain resilient if crude prices or realizations weaken, and whether Downstream margins recover from the Q2 decline.
Cash conversion after working-capital movements, planned capital spending, dividends and the announced share-repurchase program; also monitor short-term borrowing and refinancing capacity.
The comparability of reported revenue across periods given the third-party tax presentation change, and the sustainability of the higher effective tax rate.
Developments in Ecuador enforcement proceedings and other environmental, climate, tax and legal contingencies; the filing does not provide a clear estimable loss range for the Ecuador matter.