Chevron Corporation — 2015 Q3 Form 10-Q
Business context and period. Global integrated energy company reporting for the three and nine months ended September 30, 2015; financial statements are unaudited. Results reflect a sharp decline in oil and gas prices since mid-2014. Unless noted, amounts are U.S. dollars.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Sales and operating revenues | $32.8 billion | $51.8 billion | $101.9 billion | $158.4 billion |
| Net income attributable to Chevron | $2.04 billion | $5.59 billion | $5.18 billion | $15.77 billion |
| Diluted EPS | $1.09 | $2.95 | $2.76 | $8.29 |
| Operating cash flow | Not separately stated for quarter | $14.9 billion | $25.0 billion | |
| Capital expenditures (cash-flow statement) | Not separately stated for quarter | $22.1 billion | $25.7 billion |
For the first nine months, operating cash flow less cash capital expenditures was negative approximately $7.2 billion. The company paid $6.0 billion in common dividends during the period. Its quarterly dividend remained $1.07 per share; an October 2015 declaration was payable in December.
- Segment earnings, Q3: Upstream earned $59 million, down from $4.65 billion; Downstream earned $2.21 billion, up from $1.39 billion.
- Segment earnings, nine months: Upstream recorded a $600 million loss versus $14.22 billion in earnings; Downstream earned $6.59 billion versus $2.82 billion.
- Upstream weakness primarily reflected lower crude and natural gas realizations, higher depreciation and tax items. Downstream benefited from stronger refined-product margins. Nine-month Downstream earnings included a $1.6 billion gain on the sale of Chevron’s Caltex Australia interest.
- Worldwide net oil-equivalent production averaged 2.539 million barrels per day in Q3, down 1% year over year; it averaged 2.605 million barrels per day for the nine months, up 1%.
Balance sheet, liquidity and material changes
- At September 30, cash, cash equivalents and marketable securities totaled $13.2 billion. Current assets were $39.8 billion and current liabilities $30.1 billion; the reported current ratio was 1.3.
- Total debt and capital lease obligations were $35.9 billion, up from $27.8 billion at year-end 2014. The debt ratio rose to 18.8% from 15.2%. The company reported $10.6 billion outstanding under its $20 billion commercial-paper program and no borrowings under $8 billion of committed credit facilities.
- Operating cash flow fell from $25.0 billion to $14.9 billion for the nine-month comparison. Cash capital expenditures declined, while the company also raised $6.0 billion through long-term debt issuance.
- Depreciation, depletion and amortization increased to $15.6 billion for the nine months from $11.9 billion, mainly due to upstream impairments, higher production and higher depreciation rates. The filing attributes significant impairment and project-suspension charges to a downward revision in the company’s longer-term crude-oil price outlook.
- Other notable items included the Caltex sale gain, $38 million of Q3 pre-tax charges for upstream employee-reduction programs, and $1.982 billion of nine-month exploration expense, up from $1.475 billion.
Outlook, commentary and risks
- Management expected full-year 2015 net oil-equivalent production to be flat to 3% above 2014. It said the duration of low prices was uncertain and planned further operating-cost reductions, employee reductions, lower capital and exploratory spending in 2016 and later periods, and additional asset sales.
- Management expected oil markets eventually to rebalance as demand grows and supply growth slows, but gave no timing for price recovery. Brent averaged $50 per barrel in Q3 2015, versus $99 for full-year 2014; U.S. Henry Hub natural gas averaged $2.80 per thousand cubic feet for the first nine months, versus $4.62 in the prior-year period.
- Production in the Saudi Arabia–Kuwait Partitioned Zone had been shut in since late May 2015 because of difficulties obtaining work and equipment permits. The duration was uncertain; management said the 2015 financial effect was not expected to be significant.
- Major execution developments included first production from the Lianzi project and continuing commissioning and construction work at Australia’s Gorgon and Wheatstone projects.
- The Ecuador litigation remained a significant, uncertain contingency. A $9.5 billion Ecuadorian judgment was under appeal; enforcement actions were proceeding in Canada, Brazil and Argentina. Chevron disputed the judgment and said it could not estimate a reasonably possible loss or range. The filing also describes MTBE, environmental, tax, guarantee and other contingencies.
- Management identified commodity prices, refining margins, project delays, production performance, foreign exchange, regulatory and political developments, environmental matters and litigation among factors that could materially affect results. Disclosure controls were deemed effective, with no material change in internal control reported for the quarter.
Important facts for investors to verify
- Whether low oil and gas prices persist and how they affect upstream earnings, cash generation, leverage and the planned 2016 spending reductions.
- Whether production meets the flat-to-3% growth outlook, particularly given the Partitioned Zone shut-in, mature-field declines and project ramp-ups.
- Whether Downstream margins and asset-sale proceeds can continue to offset upstream weakness, and how much reported earnings depend on one-time gains.
- Debt, refinancing needs and dividend coverage if operating cash flow remains below capital expenditures and distributions.
- Developments in the Ecuador appeals and enforcement proceedings, as well as tax, environmental and other unresolved contingencies whose ultimate exposure is uncertain.