Chevron Corporation — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; filed August 4, 2011. Financial statements are unaudited. Chevron is an integrated energy company reporting Upstream and Downstream segments.
Key financial results
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Sales and operating revenues | $66.7B | $51.1B | $125.1B | $97.8B |
| Net income attributable to Chevron | $7.7B | $5.4B | $13.9B | $10.0B |
| Diluted earnings per share | $3.85 | $2.70 | $6.94 | $4.97 |
| Dividends per share | $0.78 | $0.72 | $1.50 | $1.40 |
- Revenue increased about 31% in Q2 and 28% for the first half, primarily reflecting higher prices for crude oil, natural gas and refined products. Chevron-attributable earnings increased about 43% and 40%, respectively.
- Upstream earnings were $6.9B in Q2 and $12.8B for the first half, versus $4.5B and $9.3B a year earlier. Higher crude oil realizations were the principal driver.
- Downstream earnings were $1.0B in Q2 and $1.7B for the first half, versus $975M and $1.2B. Improved refined-product margins and higher chemicals earnings supported results.
- Effective income tax rates rose to 41% for Q2 and 42% for the first half, from 38% and 39%. Chevron attributed the increases mainly to international Upstream tax factors.
Cash flow, liquidity and balance sheet
- First-half operating cash flow was $20.5B, compared with $15.1B in 2010. Investing cash outflow was $16.4B and financing cash outflow was $4.9B. Cash and equivalents ended June at $13.3B, down from $14.1B at year-end.
- Cash, time deposits and marketable securities totaled approximately $18.0B. Current assets were $54.0B and current liabilities $35.2B; the current ratio was 1.5, down from 1.7 at December 31, 2010.
- Total debt and capital lease obligations were $11.5B, unchanged from year-end; the reported debt ratio declined to 9.1% from 9.8%. Chevron had $6.0B of committed credit facilities and no borrowings under them at June 30.
- Capital and exploratory expenditures, including the company’s share of equity-affiliate spending, were $13.4B for the first half, up from $9.4B. Chevron paid $3.0B in dividends and repurchased $1.75B of shares during the period.
- Chevron acquired Atlas Energy for approximately $4.5B, including cash consideration and assumed debt. The acquisition added Marcellus Shale assets to Upstream.
Material changes and operating developments
- Worldwide net oil-equivalent production averaged 2.73 million barrels per day in the first half, down from 2.76 million a year earlier. Normal field declines, maintenance and weather-related downtime contributed; project ramp-ups and Atlas partly offset decreases.
- Upstream earnings benefited from higher crude realizations, while higher operating and exploration costs and lower production partly offset gains. Downstream results benefited from improved margins, though U.S. refined-product sales were lower.
- Chevron classified $1.4B of assets as held for sale at June 30. The Pembroke Refinery and related U.K. and Ireland downstream assets were sold on August 1, 2011; the filing said their first-half earnings contribution was not material.
- Chevron continued its downstream and corporate restructuring. Approximately 2,100 employees had been terminated through June 30 under programs expected to be substantially completed by year-end.
Outlook, risks and contingencies
- Chevron estimated 2011 oil-equivalent production would average 2.73 million barrels per day, based on a first-half average Brent price of $111 per barrel. The estimate is subject to production-sharing and royalty effects, field declines, project delays, weather, political conditions, quotas and other operating risks.
- Management highlighted exposure to volatile crude and natural gas prices, refining and chemical margins, cost inflation, geopolitical disruption, regulation and the timing of major projects. Deepwater Gulf of Mexico permit timing and regulatory effects following the Deepwater Horizon incident remained uncertain.
- The Ecuador Lago Agrio court issued an adverse judgment in February 2011, assessing approximately $8.6B in damages, about $0.9B for plaintiffs’ representatives, and an additional $8.6B in punitive damages absent a public apology. Chevron appealed and challenged enforcement; management said it could not estimate a reasonably possible loss or range.
- Other exposures include 20 pending MTBE-related lawsuits and claims, environmental obligations, tax audits, guarantees and purchase commitments. The Richmond refinery upgrade was subject to permitting litigation and a revised environmental review; management could not estimate any financial effect.
- Management said known environmental obligations were provided for and did not expect additional costs to materially affect consolidated financial position or liquidity, though costs could materially affect results in a period. Disclosure controls were assessed as effective, with no material internal-control changes reported.
Investor facts to verify
- Track whether production meets the 2011 estimate and how crude prices, production declines and project start-ups affect volumes and earnings.
- Monitor the Ecuador judgment, appeals, enforcement efforts and related U.S. litigation; the potential loss is not estimable in the filing.
- Assess the effects of the Pembroke sale and other asset dispositions, including proceeds, gains or losses, and the company’s downstream earnings mix.
- Review capital spending, Atlas integration, pension contributions and share repurchases against operating cash generation and liquidity.
- Follow effective tax rates, open tax examinations, environmental matters and refinery permitting developments for changes in exposure.