Chevron Corporation — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results; it is an annual report, not a standalone quarterly filing.
Business context
Chevron is an integrated global energy company operating in upstream (oil and gas production, LNG and related activities) and downstream (refining, marketing and chemicals). Results are strongly influenced by commodity prices, production levels and refining margins.
Financial and operating performance
| Metric | 2018 | 2017 |
|---|---|---|
| Sales and other operating revenues | $158.9 billion | $134.7 billion |
| Net income attributable to Chevron | $14.8 billion | $9.2 billion |
| Diluted earnings per share | $7.74 | $4.85 |
| Cash provided by operating activities | $30.6 billion | $20.3 billion |
| Capital expenditures (cash-flow statement) | $13.8 billion | $13.4 billion |
| Cash, cash equivalents, marketable securities and time deposits | $10.3 billion | $4.8 billion |
| Total debt and capital lease obligations | $34.5 billion | $38.8 billion |
| Current ratio | 1.3 | 1.0 |
| Debt ratio | 18.2% | 20.7% |
Reported revenue increased 18% and Chevron-attributable net income rose 61%. Revenue comparisons are affected by an accounting presentation change: beginning in 2018, excise, value-added and similar taxes collected for third parties were excluded from revenue and netted against taxes other than income; those taxes were $7.2 billion in 2017. Reported consolidated margins are not clearly provided in the filing.
- Segment earnings: Upstream earnings increased to $13.3 billion from $8.2 billion, reflecting higher oil and gas realizations, increased gas sales and production. Downstream earnings declined to $3.8 billion from $5.2 billion, including lower international refining margins and lower asset-sale gains.
- Production: Worldwide oil-equivalent production averaged 2.930 million barrels per day, up 7% from 2.728 million. U.S. production rose 16%; international production rose 4%. Proved reserves totaled 12.1 billion barrels of oil-equivalent, up 3%, with a 136% reserve replacement ratio.
- Cash flow and investment: Operating cash flow less cash capital expenditures was approximately $16.8 billion (a simple calculation, not a company-defined measure). Capital and exploratory expenditures, including the company’s share of affiliate spending, were $20.1 billion.
- Q4: Chevron-attributable net income was $3.73 billion, or $1.95 diluted per share, versus $3.11 billion and $1.64 in Q4 2017. Q4 revenue was $40.3 billion versus $36.4 billion.
Material changes and unusual items
- Higher commodity prices and production supported earnings and operating cash flow. Brent averaged $71 per barrel in 2018 versus $54 in 2017; international gas realizations also increased.
- 2017 included significant U.S. tax-reform benefits, which did not recur in 2018. The effective tax rate was 27.8% in 2018 versus a benefit rate of 0.5% in 2017.
- 2018 earnings included approximately $630 million of after-tax asset-sale gains and approximately $2.0 billion of after-tax upstream impairments and other asset write-offs.
- Chevron paid $8.5 billion in common dividends and repurchased $1.75 billion of shares in 2018. The annual dividend was $4.48 per share.
- Cash and near-cash balances increased, while debt declined. The company repaid $6.7 billion of long-term notes as they matured, partly offset by higher commercial paper.
Outlook, risks and contingencies
- Management forecast 2019 oil-equivalent production growth of 4%–7% versus 2018, assuming Brent at $60 per barrel and excluding anticipated 2019 asset sales.
- 2019 capital and exploratory expenditures were estimated at $20 billion, including $6.3 billion of affiliate spending; approximately 87% was budgeted for exploration and production. Management said spending could be further restricted if oil prices deteriorate.
- The company targeted $5–$10 billion of before-tax asset-sale proceeds for 2018–2020; 2018 proceeds were $2.0 billion. A new share-repurchase authorization of up to $25 billion was approved in February 2019, with no fixed term or required purchase amount. The quarterly dividend was raised to $1.19 per share.
- Key risks include oil and gas price volatility, project execution and reserve replacement, political and regulatory changes, operational incidents, cyber threats, litigation, and climate-related regulation or litigation. U.S. sanctions on Venezuela’s state oil company introduced additional uncertainty for Chevron’s affiliate operations there.
- Environmental remediation reserves were $1.327 billion; asset-retirement obligations were $14.05 billion, primarily for upstream assets. The Richmond refinery consent decree, pending court approval, included a $2.95 million civil penalty, $10 million for environmental projects and estimated process-safety investments of $150 million.
- The Ecuador litigation remains a significant contingent matter. Chevron disputes the judgment and is pursuing arbitration and other defenses; management said a reasonably possible loss or range could not be estimated. Management also cited potential environmental and climate-related liabilities, while stating it did not expect known environmental obligations to materially affect liquidity or financial position.
Most important facts for investors to verify
- Whether production growth and major-project ramp-ups support the 2019 forecast, and how asset sales affect reported volumes and earnings.
- How much of 2018’s earnings and cash-flow improvement is sustainable at lower or changing commodity prices, particularly given the absence of 2017 tax-reform benefits.
- The timing, cost and execution risks of major projects, including Tengiz, Permian developments and Australian LNG operations.
- Debt maturities, liquidity and shareholder distributions relative to operating cash flow and planned capital spending.
- Developments in Venezuela sanctions, Ecuador enforcement and arbitration proceedings, environmental obligations, and climate-related regulation or litigation.
- The effect of the revenue-tax presentation change when comparing 2018 revenue with prior periods.