Chevron Corporation (NYSE: CVX) — 2009 Form 10-K
Reporting period: Fiscal year ended December 31, 2009. The filing also reports fourth-quarter results; this is an annual report, not a standalone quarterly filing. Financial amounts are in U.S. dollars.
Business context
Chevron is an integrated energy company operating in upstream exploration and production, downstream refining, marketing and transportation, chemicals, and other businesses. Upstream generated most segment earnings in 2009. The year’s results reflected sharply lower commodity prices and a weak global economy, partly offset by higher production and lower expenses.
Financial and operating results
| Metric | 2009 | 2008 |
|---|---|---|
| Sales and other operating revenues | $167.4 billion | $265.0 billion |
| Net income attributable to Chevron | $10.5 billion | $23.9 billion |
| Diluted earnings per share | $5.24 | $11.67 |
| Cash from operating activities | $19.4 billion | $29.6 billion |
| Capital and exploratory expenditures, including affiliates | $22.2 billion | $22.8 billion |
| Cash dividends paid | $5.3 billion | $5.2 billion |
For fourth quarter 2009, revenue was $47.6 billion and net income attributable to Chevron was $3.07 billion, versus $43.1 billion and $4.90 billion, respectively, in fourth quarter 2008. Diluted EPS was $1.53 versus $2.44.
- Segment earnings: Upstream earned $10.4 billion, down from $21.7 billion. U.S. downstream recorded a $273 million loss, compared with $1.4 billion of earnings; international downstream earned $838 million, down from $2.1 billion. Chemicals earnings rose to $409 million from $182 million.
- Key drivers: Management attributed the upstream decline primarily to lower oil and gas prices. WTI averaged $62 per barrel in 2009 versus $100 in 2008; U.S. Henry Hub natural gas averaged about $3.80 per thousand cubic feet versus almost $9. Downstream results were hurt by weak product margins, lower demand and excess refining capacity.
- Production: Worldwide net oil-equivalent production averaged 2.704 million barrels per day, up about 7% from 2008, mainly reflecting new Gulf of Mexico and Nigerian production and expansion in Kazakhstan.
- Cash, debt and liquidity: Year-end cash and marketable securities were about $8.8 billion. Total debt and capital lease obligations were $10.5 billion, up from $8.9 billion; the current ratio was 1.4 and debt ratio 10.3%. Chevron reported $5.1 billion in committed credit facilities, with none drawn at year-end. Management said near-term debt maturities were expected to be refinanced without using working capital.
- Margins: The filing describes refining and marketing margins as generally weak; it does not provide a clear consolidated gross-margin figure.
- Reserves: Year-end proved oil-equivalent reserves were 8.3 billion barrels for consolidated operations and 3.0 billion barrels for affiliates. The consolidated total includes 460 million barrels of synthetic oil added following a revised SEC definition that includes oil sands.
Material changes and outlook
- Revenue fell about 37% and net income about 56% year over year as oil, gas and refined-product prices declined from 2008 levels. Operating cash flow decreased about 35%.
- Chevron estimated 2010 production of approximately 2.73 million oil-equivalent barrels per day and capital and exploratory expenditures of $21.6 billion, including affiliate spending. About $17.3 billion was budgeted for upstream projects.
- The quarterly dividend increased 4.6% in July 2009 to $0.68 per share. No shares were repurchased under the company’s repurchase program in 2009.
- Management announced plans to restructure downstream operations to improve efficiency and returns. Possible actions include further market exits, asset sales and employee reductions; future gains or losses are possible.
- Major growth projects included Gorgon LNG, for which Chevron announced a final investment decision and estimated first-phase project cost of $37 billion; first production was expected in 2014. Project timing, costs, customer agreements and partner execution remain important uncertainties.
Risks, contingencies and unusual items
- Results remain exposed to volatile oil and gas prices, refining and chemical margins, demand, foreign exchange, operating disruptions, political and fiscal changes, and project delays or cost overruns. Management identified 26% of proved reserves as located in Kazakhstan and 22% in OPEC countries.
- In the Ecuador litigation, a court-appointed engineer recommended $18.9 billion for alleged damages and $8.4 billion for alleged unjust enrichment. These recommendations were not binding; Chevron disputed the case and said it could not reasonably estimate a possible loss.
- Chevron reported $1.7 billion of environmental remediation reserves and $10.2 billion of asset-retirement obligations at year-end. The company said additional environmental costs could be material to results in a period, while not expected to materially affect financial position or liquidity.
- Other exposures include 50 pending MTBE lawsuits and claims, environmental indemnities with no stated maximum potential payment, and contractual purchase commitments. The filing states that the ultimate MTBE exposure is not determinable and could be material to net income in a period.
- 2009 earnings included approximately $1.0 billion of gains from sales of nonstrategic properties. The filing also reports $459 million of pretax impairment losses on held-and-used assets and $92 million on held-for-sale assets.
Important facts for investors to verify
- Whether production growth, including oil-sands volumes and newly started projects, supports the 2010 production outlook and future reserve replacement.
- How lower commodity prices and weak refining margins affect earnings and operating cash flow, and whether planned downstream restructuring improves returns.
- Whether the $21.6 billion 2010 spending plan, major project schedules and cost estimates—particularly Gorgon—remain achievable.
- Developments in Ecuador litigation, environmental claims and indemnities, including any change in management’s assessment of potential losses.
- Debt, liquidity and dividend coverage as capital spending, pension contributions and other contractual commitments are funded.